Personal Finance

Lessons from the Amrapali verdict

Meera Siva | Updated on July 27, 2019 Published on July 27, 2019

The Supreme Court judgement may be a small step, but it can have a big positive impact

Buying an under-construction property has not been a pleasant experience for many in the last decade. Home buyers who made down payments and paid regular instalments were stuck with projects that were delayed beyond reason. Many went to court and, finally, some interesting verdicts are being pronounced. The recent one is a landmark judgment regarding errant developer Amrapali; it comes as a relief to many aggrieved home buyers.

Case facts

Amrapali is a real-estate developer based in Noida. Started in 2003, the group has not just been developing property but has also been active in other verticals such as media and FMCG. The group was seen as highly successful — founder Dr Anil Sharma was the president of the developers’ association CREDAI-NCR; Indian cricket captain Mahendra Singh Dhoni was its brand ambassador.

So, while booking flats, home buyers felt very comfortable. But the developer failed to deliver and about 42,000 home buyers have been waiting since 2011 to get their homes completed.

About 2,500 of them went to court. An analysis by court-appointed forensic auditors indicated that over ₹3,000 crore of homebuyers’ money may have been siphoned off by the promoters.

In its ruling last week, the Supreme Court used strong statements to condemn the developer and the authorities, including banks, and local authorities, for defrauding the home buyers.

It has barred Amrapali from taking up real-estate projects and has attached the personal properties of the group chairman and directors.

The court has also ordered state-run National Buildings Construction Corp. Ltd (NBCC) to take over and complete the stalled projects for a commission of 8 per cent.

What it means

The verdict is important for home buyers as it sets a good precedent. For one, it provides a way to punish errant developers, while also ensuring that the buyers get their homes.

In the past, courts have found it difficult to take a hard stance on developers as it would jeopardise project completion and affect buyers.

Two, the Court has not just held the developer accountable, but the local authorities as well. For example, it has directed Noida and Greater Noida authorities to hand over the completion certificate and registered conveyance deed to the home-buyers within a month of completion, even if dues to the authority are not cleared.

The waiver is interesting, as the court held that the loss to the buyers was due to the inaction of the officials. Extending the responsibility can help ensure better oversight.

Three, the bench directed the Union ministry, the state government and the secretary of housing and urban development to take appropriate action on similar stalled projects.

By making this case a wake-up call, and suggesting that other projects in the country be closely scrutinised, there is a move to actively monitor rather than take late corrective action.

Four, the Court pulled up the auditors as well as lenders, including Bank of Baroda, who had given sizeable loans, for failing to monitor the diversion of funds by Amrapali. Going forward, banks may exercise greater oversight on builders and progress of projects. This may help ensure that the loan purpose is met and houses are delivered.

Five, the appointment of NBCC to complete the project sets an interesting precedent. In the past, when the RERA courts penalised the builder, home buyers were left with a difficult choice. They had to find some other builder, and this meant a new set of problems. Directing a state-run developer to finish it, for a nominal charge, bodes well for buyers.

Some questions

There is no doubt that the judgment is progressive. It is not just limited to Amrapali but is a message to all the fraudulent builders, who have been milking hapless homebuyers with similar fraudulent tactics. Still, there are some questions.

One, many developers are heading towards default — about ₹1,29,000 crore a year on debt has to be repaid by developers but they generate only less than half that amount in income, as per research firm Liases Foras’ analysis of about 11,000 companies. But placing the burden of development on the state-run NBCC may not be a viable solution. What are the alternatives?

Two, the court has asked homebuyers to deposit outstanding amounts, as per the contract, within three months. There is no clarity on when the work will start; placing the financial burden on buyers seems unfair.

Three, the Court has cancelled Amrapali’s RERA registration. This raises the question of what due diligence is followed before granting registration to a developer. Can buyers really trust a developer or a project registered under RERA?

Four, if the Amrapali group siphoned off home-buyers money with the connivance of the local authorities, what are the steps that will be taken to ensure that this is not repeated with other developers?

The writer is an independent financial consultant

Published on July 27, 2019

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