Separate account “not escrow account”

As observed from some real cases, it has been noted that the industry is in a confusion regarding the meaning of the word used in the act. Therefore to clarify on that basis this is being written. The violation of this provision of this act is a criminal offense.

In recent case observed wherein, HRERA and UPRERA filed criminal case against India bulls Housing Finance Ltd., Industrial Finance Corp of India Ltd. and PNB Housing Finance Ltd. for using from the 70% of funds maintained under the provision of Section 4(2)(l)(D) of the RERA Act, 2016 for repaying the loans taken from banks and financial institutions.

As per the RERA Act, 2016, the word used is Separate account, not an escrow account as also clarified by the Honourable Union Minister for Urban Development while presenting the bill in Lok Sabha.

Notable points:
1. The separate account has been used and defined as any other normal account maintained by the promoter to keep its 70% funds as asked by the RERA Act, 2016.
2. However, there is a huge difference between an escrow account and a separate account.

3. Investopedia defines the escrow account in the following manner:
An escrow account can be used in the sale of a house, for instance, if there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In the concerned case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. This relieves the seller in the process of allowing the house to be inspected that the buyer is capable of making payment. Once all the conditions are satisfied, the escrow transfers the payment to the seller, and the title is transferred to the buyer.

4. Generally defined as per the industry an escrow account is a temporary pass-through account held by a third party during the process of a transaction between two parties. This is basically a temporary account as it operates until the completion of a transaction process, which is implemented after all the conditions between the buyer and the seller are settled.

5. In real estate, the fund flows for the development of the project from any source is kept in the escrow account and the funds utilized for the same are also generated from the escrow account. The homebuyers of a project transfer the home price to the escrow account and the amount is not transferred to the seller until the project is completed.
The proportionate stage-wise construction payments are disbursed to the seller from the escrow account so that the builder has sufficient funds for completion of the project. Sellers also benefit from the prioritization mechanism, also called the waterfall mechanism, wherein the priority-based payments are made to the concerned parties.

6. One has to be well aware that Section 4 (2)(l)(D) of the RERA Act, 2016 has used the word separate account and not escrow account. The separate account is not an escrow account.

7. The 70% of the realised amount for the concerned project from the allottees shall be deposited in a separate account to be maintained in any scheduled bank by the promoter to use it only for the purpose of the Cost of Construction and the land cost which shall be withdrawn in proportion to the percentage of completion of the project after certification to that effect by the practicing Chartered Accountant, Engineer and Architect.

8. The remaining 30% can be utilized by the promoter for other projects and purposes.

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Tags: Chartered Accountant, separate account, third party.