7. Maintenance of 70% Escrow Account under RERA
Introduction
One of the most transformative provisions introduced under the Real Estate (Regulation and Development) Act, 2016 is the requirement for promoters to maintain a separate bank account, commonly referred to as the 70% escrow account. This provision addresses one of the most critical issues historically observed in the real estate sector — diversion of funds from one project to another, leading to project delays and financial instability.
By mandating segregation and controlled utilization of funds, RERA ensures that money collected from allottees is used strictly for the project for which it is intended, thereby protecting buyer interests and improving financial discipline in the sector.
Legal Framework
Section 4(2)(l)(D) of RERA provides that:
- Promoters shall deposit 70% of the amounts realized from allottees in a separate account maintained with a scheduled bank
- The funds shall be utilized only for covering the cost of construction and land cost
- Withdrawals shall be made in proportion to the percentage of completion of the project
This provision is further supported by certification requirements from professionals, ensuring a system of checks and balances.
Objective of the Escrow Mechanism
The escrow mechanism is designed to introduce financial discipline and accountability in project execution. It ensures that:
- Funds are not diverted to unrelated projects
- Project execution is aligned with financial inflows
- Buyer payments are safeguarded
From a regulatory perspective, it creates a controlled cash flow environment, reducing the risk of project abandonment or delay.
Key Compliance Requirements
Deposit of Funds
Promoters are required to deposit:
- At least 70% of the amounts collected from allottees
- Into a separate designated bank account
This account must be project-specific and cannot be used for general business purposes.
Utilization of Funds
Funds from the escrow account can be used only for:
- Construction cost
- Land cost
The utilization must be directly linked to the progress of the project.
Withdrawal Mechanism
Withdrawals from the escrow account are subject to strict conditions:
- Must be in proportion to the percentage of completion of the project
- Must be supported by certifications
This ensures that funds are released gradually as the project progresses.
Certification Requirement
Each withdrawal must be certified by:
- Engineer → certifying stage of construction
- Architect → certifying percentage of completion
- Chartered Accountant → certifying financial utilization
Authorities increasingly scrutinize whether certifications are based on actual site progress or merely documentation. Mechanical certification may expose both promoters and professionals to liability.
Practical Challenges in Implementation
While the provision is conceptually straightforward, its implementation presents several practical challenges:
- Cash flow mismatches due to timing of collections and expenses
- Difficulty in allocating common expenses across multiple projects
- Delays in obtaining professional certifications
- Pressure to manage liquidity outside escrow constraints
In many cases, promoters face operational constraints due to restricted access to funds, especially in the early stages of development.
Risks of Non-Compliance
Non-compliance with escrow requirements is treated seriously under RERA and may result in:
- Monetary penalties
- Freezing of bank accounts
- Suspension or revocation of project registration
- Increased buyer litigation
Further, any indication of fund diversion is likely to trigger regulatory investigation.
Buyer complaints regarding fund misuse often lead to detailed scrutiny of escrow transactions.
CABTA Insights
- Escrow compliance is a core pillar of RERA enforcementAuthorities place significant emphasis on monitoring fund flow and utilization.
- Fund diversion is one of the most litigated issues in real estateEven indirect diversion or misallocation may lead to severe consequences.
- Certification should be evidence-based, not proceduralProfessionals involved in certification must ensure actual verification.
- Financial planning must align with escrow restrictionsPromoters should structure project finances keeping escrow constraints in mind.
Strong internal controls reduce compliance riskMaintaining proper documentation and reconciliation of fund usage is critical.
