Bank guarantee clause scrapped by Noida CEO in 2006, then dues shot up, Real Estate News, Realty Beat

Bank guarantee clause scrapped by Noida CEO in 2006, then dues shot up, Real Estate News, ET RealEstate
NEW DELHI:: A clause for developers of projects to submit a bank guarantee was scrapped by a Noida Authority CEO in 2006 without taking approval from the board, the CAG has observed in its report that was tabled in the UP Assembly on Friday.

The dropping of this clause for an escrow account, meant to safeguard the interests of the Noida Authority against defaulting developers and allottees, led to dues piling up, the national auditor has said in the first comprehensive performance audit of the Noida Authority.

“Scrutiny of records revealed that the fact of removal of bank guarantee clause from the brochure conditions was not submitted for consideration of the board of Noida as the subsequent brochure was not put up to the board for approval and from thereafter the clause has not been included. In fact, the subsequent nine brochures were not even put up to the Board for approval and from then onwards the clause has not been included,” the CAG report said.

The brochure for the Express City scheme (March 2006) mentioned that the allottee would have to furnish a bank guarantee from a nationalised bank equivalent to one instalment along with interest on or before the execution of the lease deed and renewable till all dues are cleared. The audit observed that the Noida Authority excluded the escrow account condition in all the brochures from May 2006 onwards.

Clause 8.5 of the brochure for Express City provided that the developer was to open an escrow account in a nationalised bank where all inflows and realisations from sale/sub-lease of the plot, buildings and facilities would be deposited. The funds accumulated in this account were to be used for development of the project and the account was to be operated till the developer met its entire obligation of payments.

The CAG noted that as an instrument to safeguard the Authority’s interests on payment of dues by a developer and ensuring that funds collected from buyers are spent on that project, the escrow account was a reliable provision. The CAG also pointed out that even after the enactment of the Real Estate (Regulation and Development) Act, 2016, which stipulates a separate account, the escrow account was not re-introduced in its schemes.

The Noida Authority’s reply, citing an economic slowdown for the relaxation, didn’t impress the CAG. “The reply is not acceptable in view of the fact that there was no evidence of global economic recession during 2006 when the said clause was removed from the brochure. The reply also does not address the issue of removal of the clause without obtaining approval of the board. Moreover, in the exit conference (September 2020) the government accepted the audit observation and agreed to re-introduce and enforce the provision for bank guarantee,” said the auditor.

The audit also showed the Noida Authority unilaterally decided to provide further relief in 2009 by reducing the upfront payment for an allotment. “This reduction diminished the financial commitment of the allottee and resulted in builders garnering more allotments as the builders enjoyed greater leverage to obtain bigger plots and to take loans from banks on the back of deposit of a smaller amount of down-payment,” the report said.

The CAG pointed out that a scrutiny of files revealed that in spite of the economic slowdown that was cited for the relaxations, builders were actually demanding larger plots. “This unwarranted act of Noida resulted in undue favour to builders on the one hand and increased Noida’s outstanding dues on the other due to deferment (20% in respect of plots allotted in 2008 and 30% in respect of plots allotted during 2009 to 2011) of premium amounting to Rs 2,664.96 crore up to a 10-year period in 49 cases. “This has adversely impacted the liquidity of Noida as builders have defaulted in the payments, adding to the position of non-recovery. As on date (March 31, 2020) the overdue amount against the builders, who were extended this facility, was Rs 9,864.87 crore,” the report said.

In the schemes launched during 2006-07 by Noida Authority, the provisions in the brochure required that lease deed of the plot can be executed only after a minimum payment of 40% of the land premium. This was reduced to 20% from 2008-09. In its 161st board meeting (May 28, 2009), a decision was taken to further reduce the amount to be deposited by the allottee to 10% of the land premium and was applicable to schemes launched thereafter.

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