The Real Estate (Regulation and Development) Act, 2016 (“Act”) is a beneficial legislation enacted to balance the interest of all the stakeholders in the real estate sector. Under the Act, state governments have been mandated to frame rules for their respective states to regulate the real estate sector. A number of underlying complications with regard to the implementation of the Act have been identified since its inception. One of such ambiguity is the implications of section 15 of the Real Estate (Regulation and Development) Act, 2016.
Section 15 (1) of the said Act states as follows:
“The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from two-third allottees, except the promoter, and without the prior written approval of the Authority”
This provision raised an ambiguity as to whether change in internal shareholding, merger and acquisition of the promoter’s organization, enforcement of security by financial lender would amount to transfer or assignment of majority rights and liabilities of the promoter in respect of the real estate project thereby requiring the promoter to obtain 2/3rd consent of the allottees and consent of the Regulatory Authority. In this regard, the Maharashtra government has recently provided much needed clarity on the implication of section 15 of the Act under its Circulate No. 11/2017 (“Circular”).
Under the Circular, the Regulatory Authority has, to the satisfaction of all the stakeholders, clarified the following:
- Internal shareholding: Changes in internal shareholding of promoter’s organization shall not require 2/3rd consent of allottees and the Regulatory Authority, provided such changes doesn’t affect the obligations and liabilities with respect to the allottees and the rights and liabilities of the promoter’s organization.
- Conversion: Any conversion of the promoter entity from (i) partnership firm to LLP or private limited company, (ii) private limited company or unlisted company to a LLP or otherwise, (iii) proprietorship change by succession to legal heirs, would not require 2/3rd consent of allottees and the Regulatory Authority.
- Merger / amalgamation: Amalgamation or merger voluntarily initiated by the promoter and wherein the registered project is transferred and vested with the amalgamating company shall be regarded as transfer and the promoter would require to seek 2/3rd consent of allottees and the Regulatory Authority. However, if the amalgamation or merger or de-merger of the companies is not regarded as transfer under Section 47 of the Income Tax Act, 1961 or where 75% of the shareholders remain same in the resultant company, such amalgamation or merger or de-merger shall not fall within the restriction stipulated under said Act.
- Enforcement of security by lenders: In cases where financial institutions / creditors take over the real estate project by operation of law or by way of enforcing the security or mortgage, the promoter and/or the financial institutions / creditors are not required to seek consent as stipulated in section 15 of the Act. However, the promoter is required to inform the Regulatory Authority in writing within 7 days of being aware of the impending or potential transfer arising out of enforcement of security or mortgage.
It would be interesting to see how do other States react to this Circular and whether they would also follow the same or similar provisions as envisaged in the Circular.