Private Equity Investor Classified As Promoter Under RERA

By August 26, 2022 No Comments

A recent Order dated June 30, 2022 (‘Order’) passed by the Division Bench of the Maharashtra Real Estate Regulatory Authority, Mumbai (‘Authority’) in the Complaint No. CC006000000220888 between Rare Township Private Limited (‘Complainant’) v. IIRF India Realty VIII Ltd. (‘Respondent’), held that investors (including private equity investor) who invest in / partner with developers in real estate transactions and have veto rights with respect to the project will  also classify as ‘promoter’ under the Real Estate (Regulation and Development) Act, 2016 (‘RERA’)

Some of the key aspects of the Order passed by the Authority are as under:
i.   Brief Facts
•   The Complainant is registered as a promoter with respect to the project being ‘Rising City’ which is divided into 17 phases (‘Project’);
•   The completion date for the Project for each of the phases is December 30, 2024 and December 30, 2026 respectively;
•   The Respondent is one of the investors who agreed to participate in a company of the Complainant (‘Company’) by way of an investment and/or a financier, as per the terms agreed between them under a share subscription agreement (‘SSA’) and shareholders’ agreement (‘SHA’);
•   Pursuant to the SSA and SHA, there were certain veto powers upon the Respondent which would decide the manner in which the Project has to be constructed including: (a) the mandatory presence of one member of the Respondent to conduct board meetings; and (b) restrictive conditions wherein the Respondent exercises controlling rights for expenditures etc.;
•   The Complainant submitted that owing to the veto conditions under the SSA and SHA, the Respondent squarely fits within the definition of a ‘promoter’ as defined under Section 2(zk) of RERA and Circular No. 12/2017 dated December 04, 2017; and
•   The Respondent submitted that the veto powers were only reactive in nature and are not controlling rights, and that veto rights exercised by a minority shareholder cannot mean exercising control. The Respondent also submitted that it could not have caused the construction, as the construction started in 2004 and it became a part of the Project in 2008 and there was a ‘put option’ whereby the Respondent could exit the Project.
ii.  Key Grounds Considered by Authority
Constructs and Causes to Construct:
•   The Authority held that under Section 2(zk) of RERA, it is very clear that a ‘promoter’ is not only the one who constructs but also one who causes to construct and the legislature has not stopped at including a person who constructs, in the definition of ‘promoter’ under RERA, but has widened the scope to include a person who causes the construction to also be a ‘promoter’.

Meaning of the Word ‘Causes’ is Examined:

•   Relying on the Black’s Law dictionary, it is stated that the meaning of the term ’causes’ simply implies an entity who becomes the reason or the instrument to trigger a particular action. The trigger does not necessarily mean an affirmative action but also becomes a cause for an action not being taken. The term ’causes’ is thus not limited to just causing something to be done but goes beyond to also include causing something not to be done or causing something to be done in a particular manner.
•   The Authority recognised that there are certain clauses necessary to protect the interest of the Respondent. However, at the same time the Authority stated that it has the responsibility to ensure that promoters and investors, and their respective interests are protected for the larger wellbeing of the real estate sector. It further stated that from the present complaint it was clear that, one party i.e., the Complainant is involved in executing the Project and there is a second party i.e., the Respondent is involved in financing and funding the Project.
•   The Authority after minutely analysing the SSA and SHA and its impact vis-à-vis the subject real estate projects observed that the powers and rights under the aforesaid agreements (some of which being ‘veto rights’) clearly demonstrates that the Respondent is covered under ambit of the definition of the term ‘promoter’ under RERA.

Distribution of Liabilities No Concern of Consumers:

•   The Authority stated that both the Complainant and the Respondent in the present complaint are Promoters. All liabilities arising out of a breach will fall upon both, the Complainant and the Respondent and how the same is distributed and apportioned between the Complainant and the Respondent cannot be of any concern to the consumers of the Project.
iii. Order Passed by Authority
Considering the above grounds, the Authority passed the following Order:
•   The Authority held that the Respondent is a promoter (investor), and the Complainant is the promoter (developer) of the Project;
•   The Authority further directed the Complainant to complete all the documentation with regard to the addition of the name of the Respondent as a promoter (investor) on the website of the Authority; and
•   The Authority expressly cautioned that the Order cannot be and should not be used to force every Investor into the shoes of a promoter, and each Investor agreement will have to be examined individually to determine and identify recitals which fasten the definition of ‘promoter’ on him. The Authority further clarified that the Order will not be used as a paint brush to paint every investor in the color of a promoter.
iv. Key Takeaways
•   Whilst the Order categorically does clarify that the same should not be considered a precedent and should not be used to force every investor into the shoes of the promoter, a private equity investor holding significant veto / affirmative rights in a company should examine its rights and entitlement to assess whether such investor will be categorised as a ‘promoter’ under RERA.
•   All private equity investors should include adequate safeguards in their documentation including listing out specific rights and entitlement so as to the extent possible not be burdened with the liability of being a ‘promoter’ under RERA.