By Amit H Wadhwani

At last, financial institutions and secured creditors of real estate projects in Maharashtra can breathe a sigh of relief. The Maharashtra Real Estate Regulatory Authority (Regulatory Authority) has provided much needed clarity on the implication of Section 15 of the Real Estate (Regulation and Development) Act, 2016 (Act). 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.

There was lot of ambiguity amongst various legal experts and financial institutions as to whether change in internal shareholding, merger and acquisition of the promoter’s organization 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 2/3^rd consent of the allottees and consent of the Regulatory Authority.

There was also no clarity whether at the time of enforcement of a mortgage and resultant taking over of the real estate project by the financial instruction /lender, which are disclosed on the website of the Regulatory Authority, would fall within the purview of Section 15 of the said Act. And whether it would compel the mortgagee / lender to go through the tedious process of obtaining 2/3^rd consent of allottees and the Regulatory Authority.

All such ambiguities and unanswered questions have now been addressed and clarified by the Regulatory Authority under its Circulate No. 11/2017 dated November 8, 2017 (Transfer Circular).

Under the Transfer Circular, the Regulatory Authority has, to the satisfaction of all the stakeholders, clarified the following:

1. Change in internal shareholding: Changes in internal shareholding or constituents of a promoter’s organization shall not require 2/3^rd 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.

2. 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 2/3^rd consent of allottees and the Regulatory Authority.

3. 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 2/3^rd consent of allottees and the Regulatory Authority. However, if the amalgamation or merger or demerger 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 demerger shall not fall within the restriction stipulated under Section 15 of the said Act.

4. 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 (which are disclosed by the promoter to the Regulatory Authority on its website) 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 do they also follow the same or similar provisions as envisaged in this Circular of provide any further clarifications or additions thereto.

Amit H Wadhwani is a practicing Advocate

(Read the circular below)