Tuesday, March 29, 2016

Real Estate Bill - Internal control implications

1.0 Introduction
The Real Estate (Regulation and Development) Bill has been cleared by both houses of parliament. The provisions of this new legislation assume critical importance in the context of internal controls at real estate companies. CFOs, controllers and audit committees of companies in this sector need to gear up for system and process changes to ensure compliance with this new legislation and at the same time comply with the provisions of section 134 of the Companies Act.
2.0 Internal Controls - Provisions of Companies Act
As per section 134 of the Companies Act, 2013, the Board of Directors, in case of a listed company, are responsible for laying down internal financial controls and ensuring the adequacy and effectiveness of such controls. The Directors are also responsible for devising proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and operating effectively.
The companies legislation articulates that the term "internal financial controls" to mean those policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

3.0 Real Estate Regulation and Development Bill - Salient features
The salient features of the impending regulation are discussed herein below:
a.

Every commercial and residential project (greater than 500 sq.m or having eight units) to be registered with the Real Estate Regulatory Authority (RERA) to be set up in each state,
b.

Project registration requirements apply to both on-going and new projects,
c.

Disclosures encompassing details of promoters, project plans, status of land, approvals etc. need to be submitted at the time of project registration,
d.

Builders required to deposit 70% of money collected from buyers in an escrow account to be utilized only for purpose of construction and payment of land,
e.

Sale of units to be based on carpet area,
f.

Developers and buyers to pay same rate of interest on default,
g.

Developers to advertise and sell homes in projects only after all approvals are obtained from local authorities.
4.0 Conclusion
The present legislation was anticipated as the Bill was in public domain for some time. The Board of Directors in general and audit committees in particular are responsible for ensuring that an organization has good internal controls in place to ensure compliance with all applicable laws and legislations. Systems, process and controls need to be dynamic as changes to regulatory requirements are a common and expected feature of the business environment.

It is time to gear up for these changes, more so, in the context of an impending convergence with International Financial Reporting Standards (IFRS)
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