The real estate sector post enactment of the Real Estate (Regulation and Development) Act, 2016 (Act) is witnessing major consolidation primarily on account of financial constraints faced by small and mid-sized developers. Such consolidation has resulted in developers looking to either exit from their existing projects or enter into collaboration with large established developers for completing such projects.Hence, in the present scenario, it is of the utmost importance for the industry to know the present legal regime under RERA for dealing with new developers / promoters taking over an ongoing projects from existing promoters or from lenders during the process of enforcement of their security over the project.Anticipating the likelihood of consolidation and collaboration in the industry, the legislature made specific provisions under section 15 of the Act for dealing with a change in promoter. These provisions mandate a promoter of a registered real estate project to obtain prior approval of Maharashtra Real Estate Regulatory Authority (Maha RERA) and two-thirds of the allottees for transferring majority rights and liabilities in respect of a project to a third party. Acknowledging the importance of these provisions, Maha RERA proactively issued a circular on November 8, 2017 (2017 Circular) prescribing the procedure for a change in promoter.On June 4, 2019, Maha RERA issued another Circular (2019 Circular) specifying the revised procedure to be followed for transferring majority rights and liabilities of a promoter in a real estate project to a third party. The 2019 Circular not only provides the procedure to be followed by a promoter for obtaining aforesaid approvals of Maha RERA and two-thirds of the allottees, but also specifies certain kinds of transfers that are exempted from the requirement to obtain the aforesaid approvals. Briefly, the 2019 Circular states as follows:1. Change in Internal Shareholding:Changes in internal shareholding or constituents of a promoter’s organisation shall not require the approval of two thirds of the allottees or the Maha RERA providedsuch changes don’t affect: (i) the obligations and liabilities with respect to the allottees; and (ii) the rights and liabilities of the promoter’s organisation.Maha RERA should clarify whether or not the aforesaid expression “internal shareholding” is used only in reference to transfer of shares between existing shareholders of the promoter entity or would it also include transfer of shares by existing shareholders to third parties. In this regards one should take note that provisions of Section 15 of the Act, only restricts transfer of rights/obligations of a promoter in the “real estate project” (which expression is defined under the Act to essentially mean development of building/s) and does not expressly restrict transfer of shares of promoter entity. However, courts will need to finally decide whether or not transfer of entire / majority shareholding of promoter entity resulting in change in management and control of such promoter entity to a third party falls within the purview of Section 15 of the Act.2. Conversion:Any conversion of the promoter entity from:
(i) a partnership firm to a Limited Liability Partnership (LLP) or private limited company; (ii) a private limited company or an unlisted company to a LLP or otherwise; (iii) a proprietorship change by succession to legal heirs would not require two-thirds consent of allottees or Maha RERA.3. Merger / Amalgamation:An amalgamation or merger that is voluntarily initiated by the promoter in which the amalgamating company has one or more registered projects, and wherein the registered project is transferred, shall be regarded as a transfer initiated by the promoter and the promoter would be required to obtain the approval of two thirds of the allottees and Maha RERA.However, such approval is not required if: (i) the amalgamation,merger or demerger of the companies, is not regarded as a transfer under Section 47 of the Income Tax Act, 1961; or (ii) where 75% of the shareholders of the existing company remain the same in the resultant company.For an amalgamation/ merger or demerger to fall within the scope of Section 47 of the Income Tax Act, 1961, amongst other conditions as prescribed thereunder, the following two principle conditions needs to be fulfilled: (i) all liabilities of the amalgamating company / demerged company relating to the demerged undertaking, should be transferred to the amalgamated company / resulting company; and (ii) three-quarters of the shareholders of the amalgamating company / demerged company should be shareholders of the new amalgamated company / resulting company4. Transfer Initiated by Financial Institutions / Creditors Etc.
A bare reading of the 2019 Circular suggests that approval of allottees or Maha RERA is not required in cases where transfer of the promoters’ rights and obligations in the real estate project is pursuant to enforcement of security by financial institutions or creditors or pursuant to the operation of law, provided that their loan and charge over the project was disclosed in the registration details of the project on the website of Maha RERA. This was also the position under the 2017 Circular.The 2019 Circular also provides a few examples of enforcement of security such as: (i) invocation of pledge of shares of promoters; (ii) takeover of the project under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 (IBC); and (iii) takeover of management of promoter in the case of the IBC.In view of the above, it is imperative that the lenders should ensure that their loans and charge over the project get disclosed by the promoter on the website of RERA to ensure smooth enforceability of their security.Although, the Act clearly prohibits a promoter from creating a charge / mortgage over apartments which are already allotted / sold by the promoter, however, the Act does not contain any provision expressly restricting the promoter from creating a charge / mortgage over unsold apartments or rights of the promoter over land and development thereof.Further, the new promoters should also keep in mind that in case of acquisition of the promoter entity through the process of the IBC, the new management would be required to assume all liabilities of the erstwhile promoter under the Act (such as payment of interest / penalties, and completing the project within the declared timeline).The 2019 Circular prescribes the following procedure to be followed for change in a promoter pursuant to lenders enforcing their security over the project:First, the promoter shall inform Maha RERA in writing with the format prescribed in Annexure “A”, within seven days of being made aware of the impending or potential transfer arising out of enforcement of the security or mortgage.Simultaneously, the promoter shall inform each and every allottee regarding such impending or potential transfer.Within seven days of the transfer being effected by the financial institution / creditors, such financial institution / creditors shall intimate to each of the allottees and Maha RERA of the enforcement of security and transfer of ownership of the promoter organisation or transfer of the project.Thereafter, the financial creditor (acting as new promoter) or a new promoter (appointed by financial institutions) shall apply to Maha RERA for making necessary corrections to the registration details of the project.The financial creditor shall submit an undertaking stating that they shall comply with all the obligations under the agreement for sale executed by the erstwhile promoter with the allottees and assume all the obligations of the erstwhile promoter.It is pertinent to note that Maha RERA has, in the 2019 Circular, now inserted a requirement for the promoter to submit to Maha RERA on its letterhead, an application prescribed in Annexure A, which was not the case under 2017 Circular.Annexure A is in the nature of an application by the promoter seeking permission of Maha RERA for transfer and requires enclosure of consents from two-thirds of the allottees. Thus, due to the aforesaid insertion of the Annexure A reference, the 2019 Circular could be interpreted to mean that approval of two-thirds of the allottees and Maha RERA would be required to be obtained even for enforcement of security by lenders resulting in a change of promoter.Such an interpretation would cause great stress on the lenders as it is unlikely that the promoter would be willing to take any steps for either obtaining consent of the allottees or Maha RERA in cases where the lender is enforcing its security upon default of the promoter. Also, this would discourage the lenders from financing the promoters due to the challenges that would be involved in enforcing their security over the project. Moreover, such an interpretation would also be contrary to the Interim Order dated March 16, 2018 of Maha RERA passed in the matter of Mrs. Nanda Pooniwala & Ors Vs. JVPD Properties Private Limited, in which Maha RERA took the view that under the 2017 Circular, a lender was not required to obtain approval of two-thirds of the allottees and Maha RERA for enforcement of its security. Thus, it is important that Maha RERA should immediately issue a clarification to address the aforesaid inconsistency. Nevertheless, if the validity of 2019 circular is challenged before higher judicial forums, the judicial forums will need to determine whether enforcement of security by lenders over the project (created either prior to or post allotment/sale of apartment) would fall within the purview of Section 15 of the Act as it eventually results in transfer of rights and obligations of the promoter, although it is not a voluntary transfer by promoter.5. Process to be Followed where Approvals are Required:The promoter is required to follow the following process:The promoter shall first obtain consent of two-thirds of the allottees of the project.The promoter shall apply to Maha RERA with a format prescribed in Annexure “A” along with the consent of two-thirds of the allottees as on the date of application.Under its application as prescribed under Annexure A, the existing promoter in required to make the following declarations to Maha RERA:a. There are no pending cases before any court / National Company Law Tribunal / or any authorised body regarding the transfer of the promoter’s rights and liabilities with respect to the project.b. There is no bar, in the transfer of rights and liabilities to a third party, from any of the financial institutions or financers who have a charge on the project.c. There is no prohibitory order passed by any court of law against the transfer of the present project to a third party.4. Maha RERA shall within one month of filing of such application either grant an approval (with or without any conditions) or reject such application.5. After receiving the approval of Maha RERA, the new promoter shall submit an undertaking stating that they shall comply with all the obligations under the agreement for sale executed by the erstwhile promoter with the allottees and assume all the obligations of the erstwhile promoter.The aforesaid declarations as sought from the existing promoter under Annexure A is a new requirement under the 2019 Circular and was not contemplated under the 2017 Circular. The aforesaid declaration is meant to protect the right of lenders having a charge over the project and is also meant to ensure that prohibitory orders of the judicial forums are not being breached on account of transfer of the project.This is a laudable step taken by Maha RERA that will go a long way to boosting the confidence of lenders and new promoters. However, a declaration sought from the existing promoter declaring there are no pending proceedings as regards the transfer of its rights / obligations with respect to the project (without linking it to the existence of a prohibitory order), could create complications for the existing promoter looking to exit the project.One cannot rule out the possibility of existing promoters becoming adversaries instituting frivolous proceedings regarding the transfer or assignment in order to scuttle the process of transfer of the project. Thus, such a declaration would not only create a hurdle in consolidation of ongoing projects, but also in a way adversely affect the allottees by further delaying the revival of the project.