FINTELLIGENCE ISSUE 14 NOVEMBER - DECEMBER 2017

FOREWORD

A Company is fostered in the hands of its Promoter. A promoter is known to have taken steps to set the affairs of the company in motion, to grow the business and be ultimately responsible for the kind of the company it is. The concept of ‘once a promoter, always a promoter’ is widely accepted. However, situations like takeover of an existing company by a new acquirer, voluntary exit of dormant or non-controlling promoters, insignificant control of existing promoters, partition of family forming part of promoters of a company etc. warranted for provisions of reclassification of promoters in the eyes of law. On recommendation of the Primary Market Advisory Committee, the Securities and Exchange Board of India (SEBI) introduced the legal framework for reclassifying the promoters into public shareholders and vice versa by enacting regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, which came into effect from September 02, 2015. This is aimed to address the long awaited concerns of promoters as regards to their exit from the company when they are no longer exercising the control. Our article on ‘Re-classification of Promoters – Yes Promoters can be changed’ tries to unfold this legislation in finer details.

The Centre’s landmark move of demonetization and changing policy environment from Reserve Bank of India has left banks with flush of deposits. This has led to sharp fall in interest rates of fixed deposits. Fixed deposits have been a perennial favorite form of investments among conservative investors given the certainty of return and a near zero risk of losing money. However, with time, newer and better product categories have emerged which meet such intended objective, in a more tax efficient and flexible manner. In our article ‘Substitute to Fixed Deposits’,

we have introduced the investment form of Debt Mutual Funds, that primarily invests in government securities and are expected to benefit the most in the falling interest rate scenario. It offers products that take different types of interest rate and credit risk which investors can choose from in a manner that it matches the time horizon of such investments for the investors. This form of investment has started gaining popularity, especially amongst the new and first time investors, owing to its perceived better returns at calculated risk.

Due to rapid urbanization, positive demographics and rising income levels, the Indian real estate sector has attracted significant investment over the past few years. However, factors like diminishing project launches, increase in inventory pile-up, current shortfall of demand, delay in fetching requisite approvals and procedural difficulties, etc. have hampered the progress of the real estate sector. In order to address such persistent concerns, the Real Estate (Regulation and Development) Act came into force in May, 2016 for regulation and promotion of the real estate sector, to ensure sale of real estate property in an efficient and transparent manner and to protect the interest of consumers. With such unified code in place, India aims to establish speedy dispute redressal, leading to a better connected framework within the country. Our article on ‘Real Estate Regulation Act, 2016 – An Overview’ discusses this concept and its benefits to all the stakeholders of the sector.

We hope you enjoy our November – December, 2017 edition of Fintelligence. Please write back to us on fintelligence@vivro.net with your valuable feedback and comments.

VIVEK VAISHNAV ROSHAN VAISHNAV

TABLE OF CONTENTS

Re-classification of Promoters — 01 Yes Promoters can be Changed!

Debt Mutual Funds — 07 Substitute to Fixed Deposits

Real Estate Regulation and Development Act, 2016 — 11 An Overview

About Vivro 17

RE-CLASSIFICATION OF PROMOTERS — YES PROMOTERS CAN BE CHANGED!

Introduction

The Promoters are the persons who are having control

over the affairs of the Company. They are the ones who

have taken steps to bring the company into existence,

to set the affairs of the company in motion, to grow

the business of the company and are ultimately

responsible for the kind of the company it is. The

legislature has, since inception, attempted to keep the

concept of promoter open and inclusive rather than

defining it in a way to confine its meaning.

Under the Companies Act, 1956, the term promoter,

though used, was not defined. However, the

Companies Act, 2013 has defined it under section

2(69). As regards the securities laws, the SEBI (Issue of

Capital and Disclosure Requirement) Regulations, 2009

contains the definition of term promoter and in other

regulations, rules or guidelines; more or less, the said

definition is being followed. As per present legislative

framework, the Promoters are those who are named

in the Prospectus or is identified as such in the Annual

Return or who are having direct or indirect control

over the affairs of the company or in accordance with

whose advice, directions or instructions, the Board

of Directors of the Company is accustomed to act

(excluding persons advising in professional capacity).

One of the important element which classify a person

as a promoter of a company is control. The term

control “includes the right to appoint majority of the

directors or to control the management or policy

decisions exercisable by a person or persons acting

individually or in concert, directly or indirectly, including

by virtue of their shareholding or management rights or

shareholders agreements or voting agreements or in

any other manner: provided that a director or officer of a

target company shall not be considered to be in control

over such target company, merely by virtue of holding

such position.” - Regulation 2(1)(e) of SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 2011.

Since the Promoters are subject to greater obligations

and restrictions under various legislative provisions,

it is important to classify the persons into promoter

and public category. Historically, it was understood

that once a promoter, always a promoter. However

this understanding has now changed on account

of introduction of formal regulatory framework for

re-classification under regulation 31A of SEBI (Listing

Obligations and Disclosure Requirements) Regulations,

2015 (“SEBI (LODR) Regulations”)

02RE-CLASSIFICATION OF PROMOTERS —

YES PROMOTERS CAN BE CHANGED!

History

Re-classification - Unfolded

On the recommendation of Primary Market Advisory

Committee and considering the situations warranting

re-classification of Promoters like takeover of an existing

company by new acquirer, voluntary exit of dormant

or non-controlling Promoters, insignificant control of

existing Promoters, partition of family forming part

of Promoters of a company etc., the SEBI introduced

the legal framework for reclassifying the Promoters

into public shareholders and vice versa by introducing

regulation 31A of SEBI (LODR) Regulations. Regulation

31A came into effect on the date of notification of SEBI

(LODR) Regulations, i.e., September 02, 2015.

Regulation 31A provides mechanism for re-classification

of status of shareholders of companies whose

equity shares or convertibles are listed on recognized

stock exchange(s). As regards unlisted companies

or companies whose only debt instruments or non-

convertibles securities are listed on the stock exchange,

there are no regulatory provisions for re-classification.

Regulation 31A(1) mandates disclosing the shareholding of promoter and promoter group separately in the

shareholding pattern appearing on the website of all stock exchange having nationwide trading terminals.

Regulation 31A(2) authorizes the listed entity or the concerned shareholder to make application for re-

classification along with the relevant evidence. As per the guideline prescribed by Stock Exchanges, the

Promoters seeking re-classification are required to make request to the company who in turn will intimate

the stock exchange about re-classification.

Regulation 31A(2) has put stock exchange(s) in charge of handling the application for re-classification of

status of shareholder if all the conditions mentioned in this regulation has been complied with by the

applicant. In case of more than one stock exchange, they shall jointly decide on the re-classification.

In cases where any of the conditions for re-classification is not complied with, Regulation 31A(7)(d)

empowers SEBI to relax such condition on case-to-case basis if the outgoing promoter proves that neither

he nor any person acting in concert with him exercises control in the company. Accordingly, if the conditions

for re-classification are not fully complied with, then first application for relaxation is to be made to SEBI and

subsequently, application for re-classification (along with relaxation order of SEBI) is to be made to the stock

exchange.

DISCLOSURE OF SHAREHOLDING PATTERN AS PER CLASS OF SHAREHOLDER

APPLICATION FOR RE-CLASSIFICATION OR MODIFICATION OF STATUS

AUTHORITY TO WHOM APPLICATION FOR RE-CLASSIFICATION TO BE MADE

A

B

C

03RE-CLASSIFICATION OF PROMOTERS — YES PROMOTERS CAN BE CHANGED!

Regulation 31A(5), (6) and (7) provides conditions to be fulfilled for seeking re-classification under various

circumstances. These conditions are:

The following table sets out the conditions to be fulfilled for seeking re-classification under various circumstances:

Obtaining approval of shareholders at a general meeting;

Cessation of control of outgoing promoters;

Shareholding of outgoing promoters below prescribed limit;

Termination of special rights enjoyed by outgoing promoters; and

Restriction on holding of position as KMP for a maximum period of 3 years

CONDITION FOR RE-CLASSIFICATION OF PROMOTERS

As per regulation 31A(4), in case of transmission/succession/inheritance, the inheritor will be classified as

promoter. Such classification can be effected by making a request to the stock exchange by the company or

the inheritor along with evidentiary proof of inheritance.

STATUS OF PROMOTER IN CASE OF TRANSMISSION/SUCCESSION/INHERITANCED

E

CONDITIONSSR.NO.

REPLACEMENT OF EXISTING PROMOTERS

CIRCUMSTANCES OF RE-CLASSIFICATION

COMPANY BECOMING PROFESSIONALLY

MANAGEDOTHERS

Approval of Shareholder in general meeting by way of an

ordinary resolution

*Depends on facts of the case #internal view of Vivro.

No direct or indirect control of outgoing promoter

Shareholding/ Convertibles/Outstanding Warrants/Depository

Receipts of outgoing promoter

Termination of special rights enjoyed by outgoing promoter

Holding of position as KMPs by outgoing

Promoters and their relatives

Yes

Yes

Not more than 10% along with promoter group and

PAC

Yes

Subject to approval of shareholders for maximum period of

3 years

Not more than 1% along with promoter group

and PAC

Yes

Subject to approval of shareholders for maximum period of

3 years

Not specified but should be less than controlling stake#

Not specified but yes it should terminate#

Not specified but should not hold except for

rendering professional services#

1

2

3

4

5

Yes

Yes

No

Yes

04RE-CLASSIFICATION OF PROMOTERS —

YES PROMOTERS CAN BE CHANGED!

Post re-classification, shareholding of Promoters will be clubbed with public shareholding. However, the increase in public shareholding consequent to re-classification will not be counted towards achieving minimum public shareholding of 25% as prescribed under Securities Contracts (Regulation) Rules, 1957 and under SEBI (LODR) Regulations.

The re-classification of shareholding is required to be disclosed to the stock exchange(s) as a material event in accordance with regulation 30 of SEBI (LODR) Regulations, i.e., within 24 hours of event.

Further, the disclosures under SEBI (SAST) Regulations, 2011 and Companies Act, 2013 should also be made as far as they are applicable.

The re-classification of shareholding will be given effect in the shareholding pattern of the quarter in which it is approved. Further, in cases of Open Offer where post completion of Offer re-classification is to be done, the shareholding pattern is usually filed immediately after the completion of the Open Offer.

EFFECT OF RE-CLASSIFICATION AND COMPLIANCESF

The public shareholder can classify himself/itself as a promoter after giving an open offer in accordance with

SEBI (SAST) Regulations, 2011.

RE-CLASSIFICATION OF PUBLIC SHAREHOLDER AS PROMOTERG

Issues

Though regulation 31A has provided broad framework for re-classification of shareholding, yet certain issues are still

left unanswered which, inter alia, are:

Regulation 31A (5) and (6) of the SEBI (LODR) Regulations cast an obligation to obtain approval of

shareholders in case of replacement of existing Promoters by new Promoters or in case the company

becomes professionally managed. However, in case of other scenario like voluntary retirement of

certain existing non-controlling Promoters, in absence of any specific provision, the re-classification

of shareholding can be made in accordance with regulation 31A (7) which do not provide for obtaining

approval of shareholders.

Such types of re-classification has been done in Alembic Pharmaceuticals Ltd. and Krebs Biochemicals

and Industries Ltd, in which case, SEBI through its informal guidance expressed its view that approval

of shareholders may not be required. It is to be noted that as per the Stock Exchange Checklist for re-

classification, approval of shareholders is mandatory for all types of re-classification. Thus, an appropriate

clarification from SEBI in this regard is warranted.

a. Whether approval of shareholders will be required for re-classification of Promoters in situations

other than replacement of existing Promoters and company becoming professionally managed?

05RE-CLASSIFICATION OF PROMOTERS — YES PROMOTERS CAN BE CHANGED!

Though regulation 31A(7) has prescribed general conditions of non-exercise of control by outgoing

Promoters and is not specific about termination of special rights existing in favour of outgoing Promoters,

it is implied that all such special rights enjoyed by outgoing Promoters should be terminated.

b. Whether special rights have to be terminated in case of re-classification in situations other than

replacement of existing Promoters and company becoming professionally managed?

Regulation 31A(8) provides that a public shareholder can classify itself as a promoter after giving an

open offer in accordance with SEBI (SAST) Regulations, 2011. As per said regulations, an open offer gets

triggered when a person (along with PAC) crosses the limit of 25% voting rights of target company or

acquires control over target company. Whether this means only a public shareholder who owns 25%

voting rights or has control over Target Company can classify himself as promoter?

Generally, the Promoters are the persons who have control over the affairs of a company. However,

technically speaking, even the persons (whether or not having control) who are shown or identified as

promoter are also treated as Promoters in the eyes of law. Accordingly, a public shareholder can classify

himself as a promoter without owning 25% voting rights as regulation 4 of SEBI (SAST) Regulations,

2011 triggers open offer irrespective of holding the Acquirer.

c. Whether public shareholder seeking to re-classify himself as promoter has to acquire minimum

25% voting rights of the Company or prove the existence of control so as to be able to make an

open offer?

In various SEBI regulations, the term Promoter, more or less, has same meaning as also provided under

SEBI (ICDR) Regulations, 2009 and SEBI (LODR) Regulations that has also adopted the same meaning.

Technically speaking, the re-classification may relieve Promoters from their obligations and restrictions

prescribed under various SEBI Regulations but as regards other laws, this may not be the case.

Further, it is to be noted that mere re-classification will not absolve Promoters from their obligations as the

control element is the critical and ultimate factor that will decide their obligations and restrictions.

d.Whether re-classification absolves Promoters from all the obligations and restrictions prescribed

under various SEBI regulations and other laws?

06RE-CLASSIFICATION OF PROMOTERS —

YES PROMOTERS CAN BE CHANGED!

Conclusion

SEBI has, through re-classification framework, attempted to address the long awaited concerns of

Promoters as regards their exit from company when they are no longer exercising the control. Though

the framework has, more or less, provided a way out but it is yet not exhaustive substantively as well

as procedurally. However, since introduction of framework, many Promoters have taken advantage

of these provisions. To name, few companies who have opted for re-classification are: Va Tech Wabag

Ltd., Mercator Ltd., 20 Microns Ltd., Alembic Pharmaceuticals Ltd., Tanla Solutions Ltd., Sphere Global

Services Limited, Maithan Alloys Ltd., Sun Pharmaceuticals Industries Ltd., Krebs Bio- chemicals and

Industries Ltd., Crompton Greaves Consumer Electricals Limited and Gujarat Ambuja Exports Limited.

Yet a concern remains that no corresponding provisions concerning re-classification of promoters exist in

other regulations or other laws.

DEBT MUTUAL FUNDS —SUBSTITUTE TO FIXED DEPOSITS

For the longest time, investments in India meant Fixed

Deposits, Postal Schemes, Insurance or property.

Fixed deposits (FD) were not just investments; they

formed a part of our Indian tradition and culture. Our

grandparents and parents have sworn by FDs for most

of their lives. Goals were more often than not linked

to one Liquid Investment Avenue which was the Fixed

Deposit. This was so because avenues for investments

were either restricted or there was a general lack of

faith in certain forms of investments.

This is true as FDs carry some important benefits for

investors. They are liquid, have guaranteed returns and

easy to start and liquidate. Several banks also offer

loans against fixed deposits and hence investments act

as security.

However, much has changed over the years with

the development of a more robust financial system

in the country. At this point one must evaluate -

Are Fixed Deposits as attractive as they were? Or

Are they the only investment avenue to meet the

basic requirements of Interest income and capital

protection? Do they offer tax advantages over other

investment avenues?

Debt Mutual Funds

There are different types of mutual funds that invest

in various securities, depending on their investment

strategy. Debt Mutual Funds mainly invest in a mix of

debt or fixed income securities such as Treasury Bills,

Government Securities, Corporate Bonds, Money

Market instruments and other debt securities of

different time horizons. Generally, debt securities have

a fixed maturity date and pay a fixed rate of interest.

The gain comprises of interest income and Capital

appreciation / depreciation in the value of the security

due to changes in market dynamics.

Debt securities are also assigned a ‘credit rating’,

which helps assess the ability of the issuer of the

08DEBT MUTUAL FUNDS —

SUBSTITUTE TO FIXED DEPOSITS

Benefits of Debt Mutual Funds

There are various benefits offered by Debt Mutual Funds, as under:

Debt mutual funds invest in various fixed income instruments like bank Certificates of

Deposits (CDs), Commercial Papers (CPs), treasury bills, government bonds (G-sec), PSU

bonds and corporate bonds/debentures, cash and call instruments, and so on. These funds are

classified based on varying time frames. You can choose a different fund for short-term needs,

and a different one for long-term requirements. Needless to say, short-term funds tend to take

low risk as the requirement of your money is in the near term, while longer-term funds have a

slight risk to generate returns over the long-term for you. These funds are classified based on

the category and tenure of the underlying investment instruments. Every Goal with a definite

time horizon and risk profile will have a Mutual Fund category having underlined instruments

with a common maturity to meet your Goal and its intended requirements.

Bank Deposits once fixed for a specific tenure will only mature on that particular day/

date. For premature redemptions investors would usually be charged an interest penalty.

Further investors would be unable to redeem only part of the total investment in FDs, as the

instrument does not offer a part redemption facility. In case of a Debt Mutual Fund if the fund

is Exit Load free, you will have the freedom at all times to process a partial redemption and

shall receive the funds with 0 penalties. In case there is an Exit Load, a part redemption would

still be possible, however at a small cost.

Another tax-friendly feature of debt funds is that there is no tax deduction at source (TDS) on

the gains. In fixed deposits, if your interest income exceeds Rs 10,000 a year, the bank will

deduct 10.3% from this income. If you are not liable to pay tax, you will have to submit either

Form 15H or 15G to escape TDS. Moreover, in debt funds, the tax is deferred indefinitely

till the investor redeems his units. The gains from a debt fund can be set off against short

term and long term capital losses you may have suffered in other investments, unlike FDs

wherein they are taxed on an annual basis inspite of income being paid at the end of the

term maturity.

GOALALIGNMENT

PERMITTED PARTIAL

WITHDRAWAL

NO TAX DEDUCTION AT

SOURCE

securities / bonds to pay back their debt, over a

certain period of time. These ratings are issued by

independent rating organizations such as CARE,

CRISIL, FITCH, Brickwork and ICRA. Such ratings are

one amongst various criteria that assist fund houses

to evaluate the credit worthiness of issuers of fixed

income securities. Investors can choose from a wide

range of Debt Mutual Funds like Liquid Funds, Ultra

Short Term Funds, Floating Rate Funds, Short Term and

Medium Term Income Funds, Income, Gilt, Dynamic

Bonds, etc. to suit the needs of different investors,

based on their investment horizon and risk appetite.

09DEBT MUTUAL FUNDS —SUBSTITUTE TO FIXED DEPOSITS

In the long term, debt funds are far more tax efficient than fixed deposits. After three years

of investment, the income from a debt fund is treated as a long-term capital gain and is taxed

at either 10% or at 20% after indexation. In indexation, the cost of investment is raised to

account for inflation for the period the investment is held. The longer you hold a debt fund, the

bigger is the indexation benefit. In fixed deposits, if your interest income exceeds Rs 10,000 a

year, the bank will deduct 10.3% from this income.

Below example clarifies the benefit of indexation while considering tax for illustrative purpose.

Ram invested 1,000 rupees in a Debt Mutual Fund in January 2010 at 10 rupees per unit and

decides to redeem it in June 2014. At the time of redemption, the Net Asset Value (NAV) is 20

rupees per unit. The capital gain, in this case, is not 1,000 rupees (i.e. Rs. 2,000 – Rs. 1,000)

whereas it would apply indexation to adjust for inflation.

• The Cost Inflation Index for 2009–10 (year of investment) is Rs. 632.

• The Cost Inflation Index for 2014–15 (year of sale) is Rs. 1,024.

The indexed cost of purchase in 2014–15 is 1,000 X (1,024/632) = 1,620. After indexation, the

capital gain earned sums up to Rs. 380 (Rs. 2,000 – Rs. 1,620). The tax on this earning of

Rs. 380 at 20% is Rs 76.

Every time you save money or have surplus funds, you create an FD. At the end of a couple

of years, you will be saddled with 10 different FD’s with differing amounts, maturity dates and

interest rates. When you need the money, you may get confused as to which FD you should

redeem first. Adding to that, there is an ever present hassle of tracking the FD renewal date.

Debt funds do not suffer any of these disadvantages. You can open one common folio and

start investing into different debt funds with different Asset Management Companies. When

in need of funds you have the flexibility to redeem the exact amount required and funds get

credited to your bank account within 2 business days.

In a Debt Mutual Fund, the investor can enjoy the facility of receiving the exact Portfolio details,

such as the expense ratio, the Underline securities where the money given to the Fund has

been invested. This can ease the evaluation process of a suitable Debt fund for an investor.

Debt funds are also more flexible than fixed deposits. You can invest small amounts every

month by way of an Systematic Investment Plan or whenever you have surplus cash. Similarly,

you can start a Systematic Withdrawal Plan to withdraw a predetermined sum from your

investment every month. This is particularly useful for retirees who want a fixed income every

month. You can also change the amount of the Systematic Withdrawal Plan (SWP), whenever

required. Moreover, you can seamlessly shift the money from a debt fund to an equity fund or

any other scheme from the same fund house.

Although the fixed deposits have been the instrument of choice of generations of low risk

investors, it is becoming harder and harder to ignore the benefits being offered by the Debt

Mutual Funds. Debt Mutual Funds are increasingly being accepted by the new age investors

owing to greater benefits at calculated risk instead of lower risk at negligible risk. We put forth

few more myths associated with the fixed deposits among investors, which leaves behind the

option from the comparison.

TAXATION BENEFITS

CONVENIENCE AND

TRANSPARENCY

GREATER FLEXIBILITY

10DEBT MUTUAL FUNDS —

SUBSTITUTE TO FIXED DEPOSITS

Conclusion

The world has changed in many ways over the past couple of decades. Lifestyles have changed, dreams and aspirations have changed and the economy functions have changed. Many of us still carry the legacy of our parents forward and invest in fixed deposits not realizing that given the dynamic financial landscape, there are better options available now. The closest profitable alternate to FD’s are Debt Mutual Funds. The choice of the younger generation is moving towards Debt funds that offer higher returns, safety, Liquidity, flexibility and Tax efficiency. In practice, the Mutual fund industry is closely regulated and monitored by the regulator, Securities and Exchange Board of India (SEBI). Regulations set in place by SEBI keep tight reins on the risk profile of investments, on the concentration of risk that individual funds are facing, on how the investments are valued and on how closely the maturity profile hews to the fund’s declared goals. Debt funds face the Risk of Interest Rate Fluctuations especially in the case of a rising rate scenario. In case of a falling interest rate scenario Fixed Deposit’s which are locked in for longer tenures face the risk of opportunity cost. Fixed Deposits definitely deserve their own pie in your portfolio; however you may decide the exposure depending on your risk taking ability and your return expectation.

• Fixed deposits are considered to be risk free and safe as they are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). DICGC guarantees for an amount up to Rs. 100,000/- per depositor per Bank – for both principal and interest. It is noteworthy that deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount of Rs. 100,000/- shall be paid to the depositor.

• FDs are not only offered by Bank. There are various companies and financial institutions that offer fixed deposits and are governed by guidelines under sections 73 to 78 of the Companies Act, 2013. The coupon rate could be a little higher as compared to Fixed Deposits and are considered to be bearing a higher Risk as compared to Bank FD’s.

• All 5 year Fixed Deposits fetch you a Tax benefit, while only certain Bank Fixed deposits with a Lock in of 5 years that cannot be pledged neither withdrawn are eligible for Tax benefit under 80C.

• FD’s earned interest bears TDS and hence need not be added to your total income and declared. TDS is limited to the extent of 10% while if an investor falls in the tax bracket of 20% or 30% the liable additional tax will need to be paid while filing your tax returns.

REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —AN OVERVIEW

Indian Real Estate sector is one of the most globally recognized sectors and is becoming one of the fastest growing markets in the world. It has been successful in attracting not only domestic but also international investments. According to IBEF, the Indian real estate sector is expected to touch US$180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP).

Rising population, increase in income level, rapid urbanization, especially in lieu of Government support and initiative campaigns such as “Housing for All”,

“Smart City Project” have contributed to the growth and development of this sector. Approval of Real Estate Investment Trusts by SEBI has also facilitated a platform which will help in allowing all kinds of investors to invest in the Indian real estate market and is expected to create an opportunity worth Rs 1.25 trillion (US$ ) in the Indian market over the coming years.

Despite the positive outlook, the sector has not been able to reap benefits in its entirety, owing to diminishing project launches in semi-urban and rural areas and increase in inventory pile-up as well as current shortfall of demand in urban areas. The sector has also been facing procedural difficulties in fetching requisite approvals on time, which is one of the major causes of delay and inconvenience to the customers. Moreover, the prices of land and real estate in India

have increased exponentially in last decade, causing overpricing of properties. Several other factors such as rise in cost of labour and construction material, lack of sources of finance, high taxation regime like stamp duty, VAT, etc. adds to the limitations of the sector.

Real estate laws are considered to be complex yet very important from the perspective of developers, investors, and land owners. However, not many countries have a single codified law in place, unlike India. While countries like the United Kingdom, Germany does not have a regulator to monitor the sector, the United States of America is regulated at numerous levels and hence has numerous regulatory authorities rather than a single one for the industry.

India, as a developing country, has felt the need to address the persistent concerns of the real estate industry. The Real Estate (Regulation and Development) Act (“RERA” or “Act”) came into force in May, 2016 for regulation and promotion of the real estate sector and to ensure sale of real estate property in an efficient and transparent manner and to protect the interest of consumers. It also aims to establish an adjudicating mechanism for speedy dispute redressal and also to establish the Appellate Tribunal to hear appeals from the decisions, directions or orders of the Real Estate Regulatory Authority and the adjudicating officer and for matters connected therewith or incidental thereto.

12REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —

AN OVERVIEW

EVOLUTION

The National Conference of Ministers of Housing, Urban Development and Municipal Affairs of States and Union Territories proposed a law for real estate sector.

Competition Commission of India, Tariff Commission and Ministry of Consumer Affairs. Ministry of Law & Justice suggested a central legislation for real estate under specified entries of Concurrent List of the Constitution for regulation of contracts and transfer of property.

Report of the Standing Committee tabled in the Rajya Sabha and the Lok Sabha.

Union Cabinet approved the Real Estate Bill, 2015 as reported by the Select Committee of the Rajya Sabha for further consideration of Parliament.

69 Sections of the Real Estate (Regulation and Development) Act, 2016 notified by the Ministry of Housing & Urban Poverty Alleviation on 27 April 2016 bringing the Act into force with effect from 1 May 2016.

Union Cabinet approved the Real Estate Bill, 2013, which was then introduced in Rajya Sabha and the Departmental Standing Committee.

Select Committee of the Rajya Sabha tabled its report along with the Real Estate Bill, 2015.

The Rajya Sabha, Lok Sabha & President of India passed the bill. The Real Estate (Regulation and Development) Act, 2016 was published in the Gazette for public information.

All Sections of the RERA act have come into force.

January, 2009

July, 2011

February, 2014

December, 2015

April, 2016

June, 2013

July, 2015

March, 2016

May 1, 2017

13REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —AN OVERVIEW

THE RERA ACT, 2016

The RERA Act is considered as one of the landmark

legislations passed by the Indian Parliament. It aims

to regulate and promote the Real Estate sector in

India, while ensuring sale of projects to customers

in an efficient and transparent manner, protecting

the interest of the consumers and also providing a

platform and mechanism of dispute resolution if any.

In furthering the interest of consumers, it not only

holds the promoters accountable for not registering

their projects with the Real Estate Regulatory Authority

or for providing insufficient information, but it also

brings real estate brokers who facilitate the sale and

purchase of units in a project within its ambit. The

major highlights of the act are as under:

Prior registration of real estate projects with Real Estate Regulatory Authority has

been mandatory before any advertisement, marketing, booking, selling or offering

for sale. Ongoing projects for which the completion certificate has not been issued

would need to make requisite applications. It however exempts, projects below five

hundred square metres or eight apartments (including all phases), projects which

have received completion certificates, and projects for the purpose of renovation,

repair or re-development which does not involve marketing, advertising or selling of

any apartment, plot or building, as the case may be.

Special mention from the Promoter in relation to the legality of the title, expected

completion period has been insisted upon in the act. The property is to be sold on

carpet area and not on super built-up area.

Seventy percent of the amounts realized for the real estate project from the

allottees, from time to time, to be deposited in a separate account to be maintained

in a scheduled bank to cover the construction and land cost and shall be used for

that purpose only. Withdrawals to cover the cost of project shall be in proportion to

the percentage of completion of the project.

Timeline based grant of registration by the Authority, post which, if the authority

fails to grant the registration or reject the application, as the case may be, the

project shall be deemed to have been registered.

A

B

C

D

14REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —

AN OVERVIEW

Stringent rules pertaining to revocation of registration on receipt of a complaint or

on recommendation of the competent authority after being satisfied of the default

the promoter has made under the Act or any violation of terms or conditions of the

approval or in case of involvement in any unfair practices or irregularities. Obligation

of Authority consequent to lapse of or on revocation of registration has also been

defined under the Act.

E

Registration of real estate agents has been made compulsory in order to facilitate

the sale or purchase of any property. F

The Act also provides protection against any structural defects up to 5 years that

might be found after possession.G

The promoters to register the website and ensure correct information about details

of the development plans, financial details, plan details, registered agents and

consultants etc.

H

Moreover, there are some continuous disclosures prescribed under the Act and

penalty structure associated with defaults and non compliances.I

15REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —AN OVERVIEW

IMPLEMENTATION OF RERA

The Act seeks to regulate and organize the real estate

market which was largely unorganized and unregulated.

It aims to create a more equitable and fair transaction

between the seller and the buyer, especially in the

primary market and make real estate purchase simpler,

by bringing in better accountability and transparency.

RERA makes it mandatory for each state and union

territory, to form its own regulator and frame the rules

that will govern the functioning of the regulator.

As on July 31, 2017, 23 states and union territories

(UTs) have either established their permanent or

interim regulatory authorities. Gujarat, Maharashtra,

Madhya Pradesh and Punjab have established their

permanent Real Estate Regulatory Authority, while 19

states/UTs have established interim authorities.

Implementation of the Act is expected to affect all

the stakeholders of the industry and bring about a

radical change in the way the industry operates. The

industry shall be highly regulated, standardized and

enhance investor confidence. Moreover, it will bring

in the required efficiency and timely project execution

while ensuring requisite transparency throughout the

process.

The buyer shall have timely and qualitative products

at the end which shall assure safety of money and

proper utilization of funds. Prior agreements of sale

shall assure significant buyers protection. Moreover,

the buyers shall pay on the carpet area of the property

while providing warranty for any structural defect in

the building for five years by the builder. Under RERA,

regulatory bodies and appellate tribunals are being set

up in each state to solve builder-buyer disputes within

120 days.

With better systems and regulated environment, It is

expected that the developers shall be able to better

consolidate and enhance their corporate branding.

It will help modernize the sector and ensure better

project planning, implementation and management,

thereby making the entire exercise more efficient.

This shall not only lead to higher investments flowing

but also organized funding in this sector. Greater

transparency and adoption of best practices shall lead

to minimum litigations.

Moreover, RERA shall impact government initiatives

like Smart Cities Project which fall under the ambit of

RERA. All smart cities projects coming up in states

that have notified RERA rules will have to comply

with the regulatory norms. It may impact the ability

of developers to launch or complete large township

projects spread across 100 acres or more. These

will have to be registered, launched and marketed

in phases with only those common facilities that

can be completed within the promised timelines.

Hence, going forward, one may also see development

management agreements getting signed between land

owners and branded real estate developers. The latter

would be brought in to execute, market and complete

the project within the stipulated timelines for a fee.

16REAL ESTATE REGULATION AND DEVELOPMENT ACT, 2016 —

AN OVERVIEW

Conclusion

Looking forward to 2020 and beyond, this

landmark legislation is expected to bring

transparency and stability in an otherwise

largely unorganized sector. It is expected to

transform the industry while enabling rapid

social and economic changes. Demographic

shifts and Government initiatives like ‘Housing

for All’, ‘Smart Cities’ along with adoption

of RERA Act and The Benami Act shall not

only bring in the required transparency but

also facilitate simplicity and efficiency in the

sector while boosting investor confidence and

promoting more organized and alternative

means of financing nationally as well as

internationally.

ABOUTVIVRO

About VivroVivro is a Financial Services Group engaged in the business of providing Investment Banking, Corporate Finance, Corporate & Financial Advisory and Wealth Management Services. Vivro Financial Services Private Limited is a Merchant Banker registered with the Securities Exchange Board of India (SEBI).

Our TeamVivro is founded by experienced professionals who have been engaged in Capital Market and Corporate Finance services for the last three decades. Our company is supported by a team of more than 90 enthusiastic and motivated people from different backgrounds with varied educational accomplishments and expertise. The talent pool of our company comprises of Chartered Accountants, Company Secretaries, MBAs, Lawyers as well as Ex-Bankers who have held senior positions at various banks and financial institutions. This mix of people infuses elements of creativity and professionalism in our workplace, which adds tremendous value to the services that we offer. With a strong team in place, Vivro is able to deliver value added solutions, tailor-made to suit the requirements of our clients.

Our Value PropositionVivro has emerged as a knowledgeable and reliable partner for businesses both in India and Abroad. Vivro has catered to several companies over the years and it enjoys tremendous confidence from clients, investors, lenders, brokers and financial institutions. Our advisory services and our ability to access the right capital for the right investment opportunity have resulted in significant stakeholder value creation. Vivro has a disciplined and demonstrated process specifically tailored for each client and transaction to maximize value.

Capital Market ServicesOur Capital Markets team assists private companies to raise capital from capital markets through Initial Public Offers of Equity & Debt Placements, while they assist public limited companies in a host of capital market transactions ranging from Rights Issue, Qualified Institutional Placements, Institutional Placement Program, Takeovers and Open Offers, Buybacks, Delistings, etc.

Corporate FinanceVivro syndicates and structures debt finance from banks and financial institutions through several instruments such as:

• Term Loans/ Project Loans

• Working Capital Finance/ Corporate Loans/Letter of Credits/Bank Guarantees/External Commercial Borrowings

• Factoring/Commercial Paper

• Inter Corporate Deposits, Structured Finance, Infrastructure Financing, etc.

Corporate AdvisoryOur corporate advisory services include:

• Private Equity and Venture Capital placement and advisory

• Mergers and Acquisitions: Buy/ Sell advisory as well as Schemes of Arrangement for Corporate Reorganization

• Valuation Services and Fairness Opinions

• ESOP Structuring and Valuation

• Business and Expansion Plans and Strategies

• Corporate Governance Reporting

• Succession Planning

• Entry into India Services

Wealth ManagementVivro Wealth Advisors Private Limited, a wholly owned subsidiary of Vivro Financial Services Private Limited provides Wealth Management solutions to its retail and corporate clients. Our Wealth Advisory journey begins with understanding the needs of our clients, which forms the basis of our investment solutions across asset classes. We deliver solutions which are aligned to our client’s goals, priorities, aspirations and risk tolerance. We follow the maxim – ‘What is right for the client is right for us’ while delivering the Financial Plan. We also offer our Treasury Management solutions to corporates through which we assist in planning and making investments in a variety of financial instruments such as fixed income funds, equity funds, commodity funds etc.

18ABOUT VIVRO

Corporate OfficeAhmedabadVivro House 11, Shashi Colony, Opposite Suvidha Shopping Center, Paldi, Ahmedabad – 380007Gujarat, India.E: ahmedabad@vivro.netT: +91 79 4040 4242

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The information contained herein is of general nature prepared by Vivro Financial Services Private Limited (‘VFSPL’, ’Vivro) on a particular subject or subjects and is not an exhaustive treatment of such subject(s). It is not intended to address the circumstances of any particular individual or entity. This material contains information sourced from third party sites (external sites). Vivro is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such external sites. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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