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Are Assured Return Schemes Likely To Be Declared Illegal By SEBI: Impact On Homebuyers And Builders

To lure people to invest in their real estate projects, many developers are offering “assured returns” schemes, which is basically a financial scam promising very high return.  Investor in residential projects are assured of a fixed rental income, while in commercial projects, those assured returns go up to as much as 12% p.a. Advertisements like premium office spaces with assured returns and easy payment plans often lured investors of commercial and retail properties and even residential assets, may now be a thing of the past with the Cabinet clearing the Banning of Unregulated Deposit Schemes Bill, 2018. The Bill seeks to crack down on assured returns schemes and treat them as ‘ponzi’ schemes. It even bars developers who promise fixed returns until possession. It now requires all deposit seekers to register with the designated authority provided under the proposed law.
 
When a consumer looks to invest his money expecting maximum return out of it, he turns to real estate sector either for booking a flat or buying a plot and in that case assured returns schemes have attracted many investors. In the past decade, there are many evident cases of fraudulent as well where investors have been cheated under such schemes.
 
In this scheme, if a developer wanted to raise money for building a proposed project, he offered an assured returns scheme to the investors. The interest rate at which it had to pay monthly returns to investors usually ranged between 10%-12% p.a. of the property’s purchase price or in its place, a fixed monthly rental is offered. This was much lower in contrast to the 16%-18% p.a. rate of interest the developer had to shell out if he opted for a loan from a commercial bank or NBFC. Typically, the developer signs an Agreement for Assured Returns with the buyer wherein the parties agree that the buyer will make an upfront down payment of 90%-95% of the property’s purchase price at the time of booking/within a few days after such a booking. After receiving this payment, the developer commences paying assured returns of around 10%-12% p.a. of the property’s purchase price paid on a monthly basis. The return was normally expressed as “commitment charges” in terms of Rs. Per sqft. of the property booked. These fixed-percentage payments continued till such time the developer leases out the property to a lessee. The remaining 5%-10% of the property’s purchase price was paid by the buyer upon receiving possession of the property.
 
In case the builder is not able to complete the building in time or unable lease the building, the scheme can collapse. If the scheme collapses and the hard earned money of people gets stuck in the projects which remain incomplete. The issue ranges from approval process to the sanctions and as well as in the execution of the project.
 
Investors were lured into such schemes for properties that were yet to be constructed or for that matter land that was yet to be acquired and in most cases developers stopped paying returns citing reasons such as financial constraints or a slow realty market. Many even abandoned projects mid-way and there were even complaints cheques that bounced.

What are their tall claims in such projects:

  • The investors are promised a high return in investments with a very low risk of return or a very consistent flow of returns are received regardless of the market conditions;
  • The schemes are sold privately and transparency is very little. They do not generally send/share their actual financial performance in a report/statement form to their clients;
  • They earn the trust of the unsuspecting investing public by even repaying some of the investments made to make it appear that they are very clean about their financial dealings.

 
Off late, the Government has woken up to root out this ‘menace’ completely in the financial sector and has brought in “The Banning of Unregulated Deposit Schemes Bill, 2018. Recent Amendments to the SEBI Act pertaining to the definition of "Collective Investment Scheme" prevent the real state sector from launching projects with assured returns. These schemes typically encourage investors to deposit 100% of the payment and then receive assured returns over the life of the project. Such schemes now are prohibited by SEBI and need to be registered with SEBI. In addition, a bill banning such schemes named as "The Banning of Unregulated Deposit Schemes Bill, 2018 (unregulated deposit schemes such as assured returns shall be banned)" has been tabled in July of this year after receiving the Cabinet approval. This will also reinforce SEBI's Rules and will prevent investors from subscribing such schemes. This is a good step taken by the government which will ensure a framework to protect the interest of investors. As a futuristic measure, this is an excellent move that ensures that there is a framework by which the investor cannot be duped by the developer. Whatever has been done in the past is illegal too but nobody can be penalized for it because liability of whatever is illegal is obviously prospective. So it probably may not offer any protection to people who have already invested in these schemes. Only thing is these people will still have to file for recoveries as they have been doing in the past, go to courts, insolvency courts as they have been recognized as financial creditors by NCLT.

However, it has been also noticed that despite these notifications and changes, such schemes are still prevalent in the industry which is largely managed by property dealers and brokers under different scheme names like assured returns and builders are of the view that it will lead to a further liquidity crisis. Though, as per the existing SEBI’s guidelines, these schemes are not declared to be illegal still, investors should refrain themselves to fall prey to these schemes and report such incidents to the designated authority so that the strict actions can be taken against those property developers or brokers.
 
Precautions to be taken/followed to avoid being trapped

  • Any Scheme offering double or triple of the principal amount in a very short period could be a trap laid for an unregulated deposit scheme;
  • Anyone or any Organization paying abnormally  interest higher than RBI guidelines (read market rates in force) can be a fraud in the making;
  • Invest only in registered NBFC or Banks/Post Offices/Other recognized Financial Institutions or mutual funds who are following regulatory guidelines;
  • Payment transactions must be made by cheque against proper receipt only (Don’t accept handwritten/rough receipt);
  • Always read Terms & Conditions of the Offer/MOU carefully before making any investment decisions;
  • Always check the past performance/criminal record of the company & the credibility of its management from Ministry of Corporate Affairs (for Registered Private/Public Limited Companies) and/or appropriate Regulator.

Note: CV Helpdesk will provide advise, aid and assistance to consumers affected adversely by such transactions including real estate, goods and services.
 
Call: 011-47331000; 47331014 during working days between 10am to 5pm.

Email: legal@consumer-voice.org

For details about CV Helpdesk please visit: www.consumer-voice.org
 

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