A Division Bench of the Maharashtra Real Estate Regulatory Authority (‘Authority’) has recently examined the issue of whether a financial investor in a real estate project, having affirmative voting right in relation to implementation of the real estate project, would qualify as a ‘promoter’ as per Section 2(zk) of the Real Estate (Regulation and Development) Act, 2016 (‘the Act’).

Brief Facts:

The Complainant (Rare Township Private Limited), a registered promoter of a real estate project filed a complaint before the Authority for, inter-alia, declaring the Respondent (IIRF India Realty VIII Limited) as a promoter of the project.

The respondent is an equity shareholder in the project company promoted by the complainant, who had invested in the project company in terms of a share subscription and shareholders’ agreement executed between the complainant and the respondent and amended from time to time (‘SSHA’). The terms of the SSHA provide, inter-alia, as follows:

1. Presence of respondent is compulsory for all board meetings of the complainant;
2. The respondent has powers of veto in certain matters including project expenditure exceeding Rs. 25,00,000 (Rupees twenty-five lacs).

The MahaRERA project registration webpage showed that the proposed completion of the real estate project had been delayed and extended.

Issue before the Authority:

Whether an investor holding equity shares in the project company and having certain veto rights, would be treated as a promoter under the Act?

Submissions by the Complainant:

The Complainant contended that the acts and conduct of the respondent under the SSHA had caused delay in the project completion. Under the SSHA, the Respondent was vested with powers and rights which enabled the respondent to delay the execution of the project. In view of these powers, the respondent was covered by the definition of a ‘promoter’ as per Section 2(zk) of the Act.

Submissions by the Respondent:

It was contended by the respondent that it was not responsible for the day-to-day construction activities in the project. The veto powers accorded to it were only to prevent certain events and occasions that might jeopardize its interests and cannot be construed as exercising control over the project. Therefore, it cannot be construed as a ‘promoter’ of the project.

Findings and analysis by the Authority:

The Authority held the investor to qualify as a promoter within the meaning of the Act.

To arrive at the aforesaid conclusion, the Authority relied on the definition of ‘Promoter’ as appearing in the Act to note that the definition, inter-alia, includes a person, who causes to be constructed a development. The Authority went on to observe that the expression ’causes’ not only covers a positive act, but also includes causing something not to be done or causing something to be done in a particular manner.

As to whether the investor in the instant case was a person who causes to be constructed, the Authority took note of the affirmative vote matters, which inter alia included right to approve project expenses above Rs. 25,00,000 (Rupees twenty-five lacs).

Whilst the Authority acknowledged that the clauses would be relevant for protection of the investor’s interest, it noted the existence of certain rights in favour of the investor, which would have enabled it to prevent the construction of the project.

Further noting the fact that the project had been stalled on account of ongoing dispute between the complainant promoter and the investor, the Authority held that the investor would qualify as a person who causes to construct the project and would qualify as a Promoter.

It may be noted that the Authority had very categorically observed that their determination of the investor as a promoter in the instant case should not be used to treat each of similarly placed investor as a promoter, and each investment agreement would have to be examined to ascertain if the terms of such documents would result in the investor qualifying as a promoter.

Argus Views:

An immediate takeaway from the decision would be to be extra careful whilst drafting affirmative voting matters. As was apparent in the instant case, the nature of affirmative voting matters extended beyond mere investor protection rights and also, extended to rights having bearing on the implementation of the project. The investors may have to tread the path cautiously to avoid being classified as a promoter and becoming subject to additional compliances, just to ensure an added level of protection to their investment in terms of specific affirmative voting matters surrounding the project implementation.

Please find attached a copy of the judgment.

This update has been contributed by Arka Majumdar (Partner) and Akshita Bohra (Associate).

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