RERA Fears make PE firms and Tactical Investors Tweak Real Estate contracts

Number of private equity as well as strategic investors who have invested in realty sector, mainly at project level, are renegotiating their contracts with the developer fearing litigation and fines once the new real estate regulations come into force. The fear is that under the Real Estate (Regulation and Development) Act (RERA), they can be labeled as promoters and may have to face firm penalties for any violation of rules by the projects they fund. The responsibility of obedience under the RERA is on the promoter. And the term has a wide definition to cover not only the developer, but also a land owner and private equity or strategic sponsor, if they actively participate in the project.

The fright is that under the Real Estate Act or RERA, they can be certified as developer and may have to face harsh penalties for any disobedience of rules by the projects they finance. The accountability of fulfilment under the RERA is on the promoter. And the term has a wide meaning to cover not only the developer, but also a property-owner and confidential equity or strategic investor, if they energetically participate in the project. There is a fret on the part of many investors - tactical as well as private equity - that they could be distinct as developers and have to share compulsion under RERA if things don't go well. Many investors are discover to dilute their roles or alteration some of the past contracts under which, if there is a lawsuit or a penalty, the developer will have to take care of that or at least contractually the compulsion can be transferred to the promoters. Industry trackers said the renegotiation between the promoters and investors have previously begun.

The promoters are either searching at diluting their stake or inserting clauses in contract whereby their accountability would reduce. These commercial contracts between an investor and the developer may not have permissible protection from RERA. The clauses that investors want to insert include shifting the monitory responsibility to pay fines from shareholder to the developer. So in case of a fine, the developer would be compulsory to pay the fine directly, without involving the investor. Many investors, including PE firms, were enthusiastically involved in design, development and promotion strategies for projects. These investors would now fall under the description of promoters and will be grateful to comply with RERA. In many cases, particularly where a foreign PE fund has invested in a project, dilute stake is also being measured. Some investors are searching to completely exit such projects or diminish their stake and thereby decrease the control. However, this may not be that effortless. Some investors are also searching at dilute their stake in the real estate SPVs but that may not be an option for all as they may not get a gainful exit.

RERA will also collision those PE firms that have taken control of some of the realty project because the developer was unable to complete it. The parameter is aimed at keeping irregularity in the sector under manage. RERA is set to offer an impetus to the generally real estate funding environment. The promoters would be required to take a disciplined move toward for project implementation and the same should reproduce in the asset agreement by any private equity shareholder. RERA implementation is probable to collision business plan projections and hence the safety structure and investment provisos need to align with the altering realities of project timelines and economics. RERA stipulate rigorous compliance, which in the attention of a successful project implementation would demand deeper engagement of the investor with the promoter for project monitoring. Further, our investment agreements are planned to ensure defence of money at all times, and the RERA norms can be a step forward to have a legal stamp on the same.

Comments are closed.