On July 23, 2019, the Supreme Court of India (“SC”) while settling the plethora of writ petitions filed against the Amrapali Group of Companies provided incomparable relief to the real estate homebuyers in its groundbreaking judgment of Bikram Chatterji v. Union of India (“Bikram Chatterji Case”). One of the main questions addressed in this case was – whether a homebuyer can be compelled to pay the home loan amount or the Estimated Monthly Installments (“EMI”) of the home loan, in cases where the loan amount is sanctioned by the banking institutions without carrying out due diligence investigations of the real estate project? Although, the answer to this question would be a simple ‘yes’, in this blog, the author aims to truly appreciate the journey of this holding while examining the liability of banks under subvention schemes.
What are subvention schemes?
A subvention scheme refers to a tripartite contract entered between homebuyers, real estate developers and banking institutions for easy availability of home loans and to provide other allied benefits to the homebuyers. One of the chief features of these schemes is that initially only 5-20% of the amount is paid by the homebuyers and the rest is paid by banking institutions to the developer in various stages. Importantly, the developer pays the interest on this home loan amount till the buyer takes possession of the property or till such time as mentioned in the buyer-developer agreement.
These schemes are now widely used by developers to attract homebuyers as it provides incentives to both. The developer gets funds and strives to construct the project within the shortest timespan so that lesser interest is levied upon him whereas, buyers tend to get timely possession of their homes. In this way, both, the needs of developers and the home buyers, are simultaneously served. But now these schemes are being widely misused to defraud homebuyers and to siphon off their hard-earned money.
Is subvention scheme a “tool of fraud”?
Subvention schemes now-a-days are even discouraged by National Housing Board (“NHB”) due to rampant fraudulent activities flourishing under the garb of “attractive” schemes. Presence of liability shifting clause under these schemes is the main perpetuator behind such frauds. According to these clauses, if the developer defaults in paying interest on the home loan then the liability to pay such interest shifts onto the homebuyer. This clause provides an easy way to the developers to raise money through public means via home loan and thereupon to evade from any sort of liability associated with that money. The whammy of such fraud is suffered by the buyer who is forced to pay the whole loan amount along with interest. One of the aiding factors behind such fraudulent actions is the negligence of the financial institutions while granting and monitoring the loan amount, whose repercussions are then suffered by the homebuyers.
Are banks at fault for conducting poor due diligence investigation under subvention schemes?
Due diligence is an indispensible activity in the real estate world. Since real estate projects involve large transactions, the due diligence to be exercised by the buyer also increases proportionately. But under a subvention scheme the dynamics of due diligence stand a bit altered. Under these schemes, a developer generally enters into mutual agreement with the financial institution to provide easy home loans to prospective home buyers. It is unequivocal to mention that touting of subvention schemes by these developers plays a considerable role in luring the buyers and buyers relying on this credibility of the bank invest in the project. However, in reality, banking institution are not obliged under Real Estate (Regulation and Development) Act, 2016 (“RERA”) or even under Reserve Bank of India (“RBI”) regulations to perform any kind of due diligence of the developer prior to sanctioning loan under such schemes.
Although, under RBI regulations, it is a duty entrusted upon all the banks/financial institutions in general to carry on due diligence investigation prior to sanctioning loan. Note that as per the recent circular passed by the National Housing Bank, now even these Housing Finance Companies (“HFC”) will be subject to RBI regulations which will provide more security to the homebuyers taking loan from these HFCs. However, due to absence of effective guidelines relating to due diligence to be exercised against developer under subvention schemes, these regulations remain a paper tiger.
Changes brought by the Bikram Chatterji case under subvention scheme
The Bikram Chatterji Case (commonly called ‘Amrapali Group of Companies Case’) has proved to be one of the best judgments for the homebuyers, providing them with some voice under such schemes. It all started in 2011, when the Amrapali Group (“the developer”) came up with their real estate project in Noida & Greater Noida for developing residential flats. Accordingly, various brochures were published, and it was assured that the possession shall be provided within 36 months (with a leeway of 6 months), and other world-class amenities were also promised. Also, provision was made for availing home loan by means of subvention schemes, which played a crucial role in attracting the homebuyers.
Around 50 to 100% of the amount was disbursed to the developer but the construction was not completed within the stipulated period, and even after the extended delivery deadline. Later, upon inquiry in the year 2018 , it was found that neither had the developer paid the lease amount to the Noida and Greater Noida land leasing authorities nor had they paid the interest payable to banks under the subvention schemes. Due to such non-payment of interest, buyers were asked to pay the loan interest defaulted by the developer which resulted in a dual loss to homebuyers.
Consequently in 2017, several homebuyers approached the National Consumer Dispute Redressal Commission (“NCDRC”). While the complaint at NCDRC was pending, a petition for winding up was filed by Bank of Baroda before National Company Law Tribunal under Section 7 of the Insolvency and Bankruptcy Code, 2016 which initiated corporate insolvency resolution process against the respondent, i.e., the developer. Accordingly, moratorium was imposed, which compelled plight of homebuyers to approach Hon’ble SC for saving their hard-earned monies.
Once the Court started to unravel this perplexing case, the fraud committed by the respondent became apparent. In order to get a clearer picture of the alleged fraud, forensic audit was ordered which reported brazen acts of deception, diversion and the money laundering done by the respondent for personal benefit. In the forensic report (¶ 60) it was found that the respondent diverted the petitioner’s money towards its 40 other companies and further misappropriated the amount for building personal assets.
The Apex Court held that the Uttar Pradesh Land Leasing authorities and bankers, by failing to comply with their legal duty, have colluded with the developer and have breached the public trust. The land leasing authorities on one hand had failed to ensure the collection of timely premium whereas, the bankers on the other hand sanctioned the loan on the condition to invest in project without inquiring about the title of the mortgaged property and had not even bothered to locate where the funds were transferred. The combination of these factors provided the developer an opportunity to defraud everyone and run away with the money.
The Supreme Court while pointing out the negligence done by the bankers found:
Firstly, the bankers had failed to comply with the due diligence norms mandatory under the ordinary regulations as they did not investigate into the title of the land before sanctioning the loan amount.
Secondly, they had failed to comply with the monitoring of fund transfer done by the respondent in its various other companies contrary to the aim for which the loan was granted. According to Section 4(2)(l)(D) of RERA, it is the duty of the bank which extends loan for the construction of the project to ensure from time to time that the money is used meticulously, for which the accounts have to be audited in every six months. Also, a chartered accountant has to certify that the amount collected for a particular project has been utilized for that project and the withdrawal has been in compliance with the proportion of the percentage of the completion of the project.
Due to gross negligence done by the authorities, the Court ordered them to recover the defaulted amount only from the monies, assets and guarantors of the developer, and not from the defrauded homebuyers.
Tersely speaking, now homebuyers cannot be compelled either to pay loan amount, interest or EMI to the bank for the fraud which has been committed by their own derelict behaviour. Prior to this judgment, sole remedy vesting with the connived homebuyers was to knock the doors of the consumer forums under Section 12 of the Consumer Protection Act, 1986 (now Section 35(1)(c) of the 2019 Act) but now remedy can be concurrently availed under RERA which will prove to be the boon for the buyers and will ensure time-bound & effective remedy.
Therefore, it can be inferred from a joint reading of RERA, 2016 (specifically Sections 4(l), 11(4)(g), 19(4) and the Preamble) and this landmark judgment, that there exists an implied duty on the banking/financial institutions to conduct due diligence investigations prior to sanctioning loan to the developers under subvention schemes where the credibility associated with the bank/financial institution plays vital role in instilling confidence in the buyers about the project thereby, luring them to invest in the project. There lies no reason for not holding these banking institutions liable under subvention schemes when they falter, either intentionally or unintentionally, in complying with the due diligence standards and monitoring of the funds disbursed under such schemes. The liability in such cases should be delineated keeping in mind the image of the scheme which is made in the mind of reasonable person while looking at the project brochure. If it is apparent from the brochure that the bank has provided an assurance under such schemes then, the bank should not be allowed to recover the amount of the default done by the developer from the innocent homebuyers. The incessant fraud propagated through these schemes can be curbed only when a reasonable due diligence is exercised by banks & homebuyers prior to entering such tripartite contracts. Apart from this, banks can make the due diligence investigation report of the developer public or can provide a copy of such investigation to the homebuyers investing under such schemes. This practise will create a clear picture of the developer and will also instill the credibility amongst buyers. Additionally, RBI should come up with regulations to monitor such schemes and to impose heavy penalty in cases where such schemes are misused either by banks or developers. In a nutshell, increased monitoring and proper investigations will certainly be the panache for the fraud prevalent under this scheme.
This article has been authored by Anusha Maurya, student at Dr. Ram Manohar Lohiya National Law University, Lucknow.