Property developers suffer from a perennial cash crunch and launch alluring schemes everyday. The Deposit Rules 2014 will help investors in this regard
The recent hype regarding the termination of jewellery instalment schemes and the newspaper advertisements put out in this regard, have made people realise that the concept of ‘deposit’ which was not taken seriously under Companies Act, 1956, can no longer be applied loosely. This is particularly for companies which offer instalment schemes and in turn promise ‘returns’ whether in cash or kind at a later date. You may read a detailed article on this subject here
Companies offering jewellery instalment schemes usually accepted instalments in cash from individuals and promised returns in the form of contribution towards the last instalment. It is in fact this promise of paying the last instalment of the scheme that spelt doom for jewellery instalment schemes, as explanation to rule 2 of Companies (Acceptance of Deposit) Rules, 2014, read as follows:
“(a) received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever XXX.” (emphasis supplied)
By ‘returns’ of course we mean the promise to pay more than what was contributed initially. Take the case of bank deposit, the return that you and I earn, is the rate of interest offered by the bank, which is on the money deposited. Thus, offering trade discount is not a ‘return’, however, offering something in addition to the amount contributed is a return, like the last instalment being paid by the company in case of jewellery scheme. The very basis of ‘deposit’ is a monetary transaction. Thus, return against anything, be it an advance towards purchase of property or jewellery will be a deposit.
How do the Deposit Rules, 2014 affect real estate developers?
As per the provisions of Deposit Rules, 2014, ‘deposit’ means funding a liability. This may either be typical money to money transactions, like a loan or issue of debentures or purchase of any goods or service, which is identified at the time of entering into an agreement itself. Looking at the provisions of Deposit Rules 2014, the following provisions are pertinent for real estate developers:
1. Advance for supply of goods or providing of services, wherein the advance is appropriated within a period of 365 days from the date of acceptance of such advance (rule 2(xii)(a)). Reading this rule, the requirement to appropriate may immediately prompt one to say that real estate projects are subject to procedural delays and hence, appropriation within 365 days may not be possible at all. For this, one needs to understand the meaning of ‘appropriation’. In general parlance ‘appropriation’ means allocation or pre-identification. Physical delivery of goods may happen at a later date.
In real estate transactions, the purchaser and the promoter enter into an agreement, whereby the property to be purchased is pre-identified and the amount of consideration is also pre-decided. The agreement referred to is of course an agreement for sale of the pre-identified property.
One may argue that this rule covers jewellery purchase schemes as well, but looking at the meaning of the word ‘appropriated’ that generally means pre-identification of the goods or service, one may conclude that in case of jewellery schemes, the question of pre-identification never arose as the jewellery would be purchased only after paying all instalments, which is not within 365 days of acceptance of the advance.
2. Advance received in connection with a property under an agreement or arrangement, provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement (rule 2(xii)(b)). The author draws your attention to the fact that mere entering into an agreement will not suffice for the purpose of this Rule.
This Rule clearly makes a reference to section 4 of the Sale of Goods Act, 1930 wherein mere entering into an agreement for sale of goods cannot be construed as a sale. For an agreement for sale of goods there must be a complete and binding agreement to transfer the property in the goods to the buyer at a price. There should be no uncertainty or indefiniteness or option to effect the sale, but a clear obligation to perform the contract within a definite time (Taken from A Ramaiya’s commentary on Sale of Goods Act, page 243, 4th edition). The underlying requirement of course is, that the property proposed to be purchased should be pre-identified. Where a transaction does not create a right in personam to enforce a sale, then it is not an agreement for sale at all, a case in point being the case of Hirji Govindji, in ref 1951 NLJ 516 (Rev.).
In any agreement, the actual possession or delivery happens only when the risk and reward attached with the property are also transferred. If the agreement for sale is a mere eyewash, where there is a possibility of withdrawal from the project, such that only the amount contributed is refunded without any penalty, then the contribution is nothing but a pseudo loan. Note that in real estate transactions, the advance is usually received from individuals and the Deposit Rules, 2014, do not have any exemption for advances received from individuals unless they fall under the provisions discussed herein.
If one were to do an internet search about various real estate schemes in India, three schemes will stand out. One being the ‘real estate buyback scheme’ wherein the developer promises to buyback the property at existing rates and also offer returns at a certain percentage over a period of time. Second is the '80:20 real estate scheme’ wherein the builder asks for only 20% of the total cost of the apartment at the time of booking and the balance 80% is payable on possession of the apartment whenever it is ready. Another scheme, which is used by a lot of real estate developers is to offer gifts in the form of car, club membership etc. when the possession is handed over. In all the cases above and as is with any real estate agreement, the property is pre-identified and by pre-identification does not only mean mere knowledge about the situation of the property, but also the dimensions and the consideration for the same. Newspapers also carry numerous advertisements about returns on purchase of property.
What do real estate investors need to be careful about?
The very reason for introducing stringent provisions in relation to deposits, including penal provisions, is to only make them cautious. In the context of the perennial cash crunch that the real estate sector usually suffers and the innovative investment schemes which come up everyday, the Deposit Rules, 2014, should act as an added caution for investors when it comes to buying property. This is because, the reason for delays in completing real estate projects is not just the rising cost of raw materials, but also procedural delays like departmental approvals. Even if the specific provisions of Deposit Rules, 2014, are taken care of, the proviso to rule (2)(xii) still holds out a beacon for real estate developers, and that is the possibility of refund if necessary approvals are not obtained in time. Where a company does not have all necessary sanctions and approval and by virtue of which, the money advanced becomes refundable, then the amount will be taken to be ‘deposit’ on the expiry of fifteen days from the date they become due for refund. For investors the recourse to enforce the refund of such deposits is to approach the Company Law Board (CLB) or National Company Law Tribunal (NCLT).
is working as a Senior Associate with Vinod Kothari & Company, Practising Company Secretaries which has offices in Kolkata and Mumbai.)