Investor or developer? Real estate regulator (RERA) classifies real estate fund as a promoter

In a recent order, Maharashtra’s real estate regulator – Maha RERA – qualified a private equity fund holding a minority equity stake as a ‘promoter’ under the Real Estate (Regulation and Development) Act (RERA) basis certain veto rights, which are quite common in the sector. The order, apparently given on equitable grounds to protect the primacy of homebuyer interests, has industry wide implications. Real estate funds could now be jointly liable with the developers to share the financial obligations imposed under RERA. The order has selectively pierced the corporate bringing to fore questions relating to corporate personality of the entity. The order could impact private equity and private credit funds investing in developmental estate.

 

In this analysis, we examine (A) the terms of the investment which were read to hold that the investor is a promoter under RERA; (B) the potential justification for the Regulator’s interpretation; (C) the impact on various stakeholders and on LP-GP relationships as a result of this Order; and (D) peculiarities of private equity investments and established standards of global deal making in real estate that don’t seem to have been appreciated. 

Key Takeaways:
  • The term ‘causes to construct’ in the definition of ‘promoter’ under RERA has been interpreted to include private funds exercising rights typical to such investments
  • Protective rights of investors have been interpreted as being secondary to the rights of the homebuyers – in a conflict, the latter should be protected, notwithstanding inter-se contractual relationship between developer and fund. To that extent, if any lender or shareholder holds up the construction – it could be held to be a ‘promoter’
  • Possibility of strained LP-GP relationships due to additional capital drawdown requirement for payment obligations arising due to a promoter classification
  • Corporate veil selectively pierced in holding a minority shareholder jointly liable as promoter basis exercise of well negotiated investor protection rights

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