Special Window Fund for Affordable Real Estate Segment: Achche Din for Home-buyers?

– Sikha Bansal and Priya Udita

(finserv@vinodkothari.com)

Relief has come to the builders of stalled housing project and distressed homebuyers in in the form of establishment of a ‘Special Window‘ fund by the Government to provide priority debt financing for the completion of stalled housing projects that are in the affordable and middle-income housing sector. See the press release here. The announcement came after this package was introduced on September 14 by the Finance Minister. The Government has also issued FAQs on the same, which can be viewed here.

The write-up discusses salient features of the plan.

KEY FEATURES OF THE FUND

  1. Fund will be set up as Category II-AIF (Alternative Investment Fund) with initial amount of Rs. 25,000 crores and registered with SEBI.
  2. The government acting as a sponsor shall infuse Rs. 10,000 crore and the remaining amount to be contributed by State Bank of India, Life Insurance Corporation of India and other institutions.
  3. Investors can be Government and other private investors including cash-rich financial institutions, sovereign wealth funds, public and private banks, domestic pension and provident funds, global pension funds and other institutional investors.
  4. The SBICAP Ventures Limited is proposed to the Investment Manager.
  5. Project declared as non-performing assets (NPAs) or which have been dragged to the NCLT for insolvency proceedings will be included. Apart from that any projects undergoing corporate insolvency resolution process before the NCLT will be considered for funding through the Special Window upto the stage where the resolution plan for such insolvency resolution process has not been approved / rejected by the committee of creditors. However, cases pending in the High Courts or Supreme Court will not be considered.
  6. The retail loans of the selected stalled projects will be restructured as per RBI Guidelines and bank board approved policies.
  7. The investments will be in the form of non-convertible debentures subject to legal, regulatory or other considerations.

Read more

SEBI’s Framework for listing of Commercial Papers

Munmi Phukon | Principal Manager, Vinod Kothari & Company

corplaw@vinodkothari.com

Introduction

SEBI on 22nd October, 2019 came out with a Circular to provide for the Framework for listing of Commercial Papers (CPs). The Circular is based on the recommendations of the Corporate Bonds & Securitization Advisory Committee (CoBoSAC) chaired by Shri H. R. Khan which was set up for making recommendations to SEBI on developing the market for corporate bonds and securitized debt instruments.

CPs are currently traded in OTC market though settled through the clearing corporations. Evidently, listing of CPs for trading in stock exchanges will enhance the investor participation which will in turn help the issuers to cope up with their short term fund requirements. SEBI’s current move in laying down the Framework is to ensure investor protection keeping in mind a prospective broader market for CPs. The Circular is mostly concerned about making elaborate disclosures at the time of submitting the application for listing and also some disclosures on a continuous basis post listing of the CPs.

As evident from the content of the Circular, some of the disclosure requirements proposed at the time of application for listing of the CPs are same as provided in the format of Letter of Offer as provided in the Operational Guidelines on CPs[1] (Operational Guidelines) prescribed by the Fixed Income Money Market and Derivatives Association of India (FIMMDA). However, there are certain additional requirements which are discussed in this article.

Disclosure requirements at the time of application for listing

Annexure I of the Circular provides for the disclosure requirements which the issuers are required to make at the time of submitting the application and the content of the same is quite elaborative which covers almost every aspect of an issuer. The broad segments of disclosures are as below:

General details of issuer
Under this heading, details such as, name, CIN, PAN, line of business group affiliation will be given. The issuer will also be required to give name of the managing director, CEO, CFO or president as chief executives. The disclosures are same as provided in the Operational Guidelines.

Details of directors
Details of current set of directors including inter alia their list of directorships and the details of any change in directors in the last 3 financial years and the current year shall be required to be disclosed.  Currently, the Operational Guidelines do not require these details.

Details of auditors
Details of current auditor and any change in directors in the last 3 financial years and the current year shall be required to be disclosed. Currently, the Operational Guidelines do not require these details.

Details of security holders
Under this category, the disclosure shall be made for top 10 equity shareholders, top 10 debt security holders and top 10 CP holders. However, the date of determination of the same has not been provided. Currently, the Operational Guidelines do not require these details.

Details of borrowings as at the end of latest quarter before filing of the application
Details of borrowings are divided into 3 parts-

a.      Details of debt securities and CPs. The Operational Guidelines require the details of CPs issued during last 15 months and also of the outstanding balance as on the date of offer letter.

b.      Details of other facilities such as secured/ unsecured loan facilities/bank fund based facilities, borrowings other than above, if any, including hybrid debt like foreign currency convertible bonds (FCCB), optionally convertible debentures / preference shares from banks or financial institutions or financial creditors. The details related to outstanding debt instruments and bank fund based facilities are same as provided in the Operational Guidelines however, it was silent on the hybrid instruments.

c.      Details of corporate guarantee or letter of comfort along with name of the counterparty on behalf of whom it has been issued, contingent liability including debt service reserve account (DSRA) guarantees/ any put option etc. Operational Guidelines do not require these details currently.

Information related to the concerned issue

The content is more or less similar to the details required to be provided in the Letter of Offer as provided in the Operational Guidelines. The additional requirements are as follows:

d.     Details of credit rating letter issued should not be older than one month on the date of opening of the issue and

e.      Copy of the executed guarantee.

Financial information
The stock exchanges shall be provided with the following financial information-

a.      Audited / Limited review of half yearly consolidated financial statements, if available;

b.      Financial statements along with auditor qualifications, if any, for last 3 years along with latest available financial results;

c.      Latest available quarterly financial results prepared under Regulation 33, if applicable;

d.     Latest audited financials not older than six months from the date of application. However, companies already complying with the Listing Regulations may submit unaudited financials with limited review.

The Operational Guidelines currently require the financial summary only of last 3 FYs to be provided in the letter of offer.

Material information
The following shall be disclosed-

a.      Details of all default/s and/or delay in payments of interest and principal of CPs, (including technical delay), debt securities, term loans, external commercial borrowings and other financial indebtedness including corporate guarantee issued in the past 5 financial years including in the current financial year.

b.      Ongoing and/or outstanding material litigation and regulatory strictures, if any.

c.      Any material event/ development having implications on the financials/credit quality including any material regulatory proceedings against the issuer/ promoters, tax litigations resulting in material liabilities, corporate restructuring event which may affect the issue or the investor’s decision to invest / continue to invest in the CP.

The disclosures in point (a) and (c) above are not required to be disclosed in the letter of offer as per Operational Guidelines.

Asset Liability Management (ALM) disclosures for NBFCs and HFCs

The Circular specifically provides for some additional disclosures for NBFCs and HFCs which are currently not required to be provided in the letter of offer prescribed by FIMMDA:

a.      NBFCs shall make disclosures as specified for NBFCs in SEBI Circular nos. CIR/IMD/DF/ 12 /2014[2], dated June 17, 2014 and CIR/IMD/DF/ 6 /2015, dated September 15, 2015. Further, “Total assets under management”, under the aforesaid Circular dated September 15, 2015 shall also include details of off balance sheet assets.

b.      HFCs shall make disclosures as specified for NBFCs in the said SEBI Circular no. CIR/IMD/DF/ 6 /2015, dated September 15, 2015, with appropriate modifications viz. retail housing loan, loan against property, wholesale loan – developer and others.

In terms of the SEBI Circular dated June 17, 2014, NBFCs are required to disclose the details with regards to the lending done by them, out of the issue proceeds of previous public issues, including details regarding the following:

a.      Lending policy;

b.      Classification of loans/advances given to associates, entities /person relating to Board, Senior Management, Promoters, Others, etc.;

c.      Classification of loans/advances given to according to type of loans, sectors, maturity profile, denomination, geographical classification of borrowers, etc.;

d.      Aggregated exposure to the top 20 borrowers with respect to the concentration of advances, exposures to be disclosed in the manner as prescribed by RBI in its guidelines on Corporate Governance for NBFCs, from time to time;

e.      Details of loans, overdue and classified as non-performing in accordance with RBI guidelines.

The Circular dated September 15, 2015 provides for the following additional disclosures:

a.      In case any of the borrower(s) of the NBFCs form part of the “Group” as defined by RBI, then appropriate disclosures shall be made as regards the name of the borrower, Amount of Advances /exposures to such borrower and Percentage of Exposure;

b.      A portfolio summary with regards to industries/ sectors to which borrowings have been made by NBFCs;

c.      Quantum and percentage of secured vis-à-vis unsecured borrowings made by NBFCs;

d.      Any change in promoter’s holdings in NBFCs during the last financial year beyond a particular threshold (RBI has prescribed such a threshold level at 26% at present).

Continuous disclosures after listing of CPs

Annexure II of the Circular provides for the disclosure requirements which shall be observed on a continuous basis. The details of such disclosures are broadly as below:

a.      Submission of financial results

i.          For issuers which are required to follow Chapter IV of SEBI LODR Regulations i.e. whose specified securities are listed, the financial results shall be in the format as prepared and submitted under Regulation 33. The issuers will also be required to disclose along with the financial results the additional line items as required under Regulation 52(4). This shall also apply to an issuer which is required to prepare financial results for the purpose of consolidated financial results in terms of Regulation 33;

·      The line items as provided under Regulation 52(4) are as below:

o  credit rating and change in credit rating (if any);

o  asset cover available, in case of non- convertible debt securities;

o  debt-equity ratio;

o  previous due date for the payment of interest/ dividend for non-convertible redeemable preference shares/ repayment of principal of non-convertible preference shares /non- convertible debt securities and whether the same has been paid or not; and,

o  next due date for the payment of interest/ dividend of non-convertible preference shares /principal along with the amount of interest/ dividend of non-convertible preference shares payable and the redemption amount;

o  debt service coverage ratio;

o  interest service coverage ratio;

o  outstanding redeemable preference shares (quantity and value);

o  capital redemption reserve/debenture redemption reserve;

o  net worth;

o  net profit after tax;

o  earnings per share:

 ii.          For issuers which are required to comply with provisions of Chapter V of the Regulations only i.e. whose NCDs/ NCPSs are only listed, the financial results shall be prepared and submitted as per regulation 52; and

iii.          Issuers who only have outstanding listed CPs shall prepare and submit financial results in terms of Regulation 52.

 

b.      Disclosure of material events

The issuers shall disclose the following details to the stock exchange(s) as soon as possible but not later than 24 hours from the occurrence of event (or) information:

i.          Details such as expected default/ delay/ default in timely fulfilment of its payment obligations for any of the debt instrument;

ii.          Any action that shall affect adversely, fulfilment of its payment obligations in respect of CPs;

iii.          Any revision in the credit rating;

iv.          A certificate confirming fulfilment of its payment obligations, within 2 days of payment becoming due.

c.      ALM Statements for issuers who are NBFCs/HFCs

NBFCs and HFCs will be required to simultaneously submit to the stock exchanges the latest ALM statements as and when they submit the same to respective regulator(s) viz RBI/NHB, as applicable.

d.     CEO/ CFO Certification

A certificate from the CEO/CFO shall be submitted by the issuers to the recognized stock exchange(s) on quarterly basis certifying that CP proceeds are used for disclosed purposes, and adherence to other listing conditions.

Conclusion

As mentioned above, the disclosure requirements as provided in the Circular are meant for assisting the investors in taking an informed decision. Since the requirements are new, it is expected that apart from the stock exchanges, FIMMDA/ RBI will also come out with the revised Operational Guidelines/ Directions in order to bring more clarity on this aspect.

 

 

 

 

 

 

 

 

 

 

 

[1] http://www.fimmda.org/modules/content/?p=1033
[2] https://www.sebi.gov.in/sebi_data/attachdocs/1403065620622.pdf

Partial Credit Guarantee Scheme

A Business Conclave on  “Partial Credit Guarantee Scheme” was organised by Indian Securitisation Foundation jointly with Edelweiss on September 16,2019 in Mumbai.

On this occasion, the presentation used by Mr. Vinod Kothari is being given here:

http://vinodkothari.com/wp-content/uploads/2019/09/partial-credit-enhancement-scheme-.pdf

 

We have authored few articles on the topic that one might want to give a read. The links to such related articles are provided below:

Government credit enhancement for NBFC pools: A Guide to Rating agencies

Vinod Kothari Consultants P Ltd (finserv@vinodkothari.com)

 

The partial credit enhancement (PCE) Scheme of the Government[1], for purchase by public sector banks (PSBs) of NBFC/HFC pools, has been discussed in our earlier write-ups, which can be viewed here and here.

This document briefly puts the potential approach of the rating agencies for rating of the pools for the purpose of qualifying for the Scheme.

Brief nature of the transaction:

  • The transaction may be summarised as transfer of a pool to a PSB, wherein the NBFC retains a subordinated piece, such that the senior piece held by the PSB gets a AA rating. Thus, within the common pool of assets, there is a senior/junior structure, with the NBFC retaining the junior tranche.
  • The transaction is a structured finance transaction, by way of credit-enhanced, bilateral assignment. It is quite similar to a securitisation transaction, minus the presence of SPVs or issuance of any “securities”.
  • The NBFC will continue to be servicer, and will continue to charge servicing fees as agreed.
  • The objective to reach a AA rating of the pool/portion of the pool that is sold to the PSB.
  • Hence, the principles for sizing of credit enhancement, counterparty (servicer) risk, etc. should be the same as in case of securitisation.
  • The coupon rate for the senior tranche may be mutually negotiated. Given the fact that after 2 years, the GoI guarantee will be removed, the parties may agree for a stepped-up rate if the pool continues after 2 years. Obviously, the extent of subordinated share held by the NBFC will have to be increased substantially, to provide increased comfort to the PSB. Excess spread, that is, the excess of actual interest earned over the servicing fees and the coupon may be released to the seller.
  • The payout of the principal/interest to the two tranches (senior and junior), and utilisation of the excess spread, etc. may be worked out so as to meet the rating objective, provide for stepped-up level of enhancement, and yet maintain the economic viability of the transaction.
  • Bankruptcy remoteness is easier in the present case, as pool is sold from the NBFC to the PSB, by way of a non-recourse transfer. Of course, there should be no retention of buyback option, etc., or other factors that vitiate a true sale.
  • Technically, there is no need for a trustee. However, whether the parties need to keep a third party for ensuring surveillance over the transaction, in form of a monitoring agency, may be decided between the parties.

Brief characteristics of the Pool

  • For any meaningful statistical analysis, the pool should be a homogenous pool.
  • Surely, the pool is a static pool.
  • The pool has attained seasoning, as the loans must have been originated by 31st March, 2019.
  • In our view, pools having short maturities (say personal loans, short-term loans, etc.) will not be suitable for the transaction, since the guarantee and the guarantee fee are on annually declining basis.

Data requirement

The data required for the analysis will be same as data required for securitisation of a static pool.

Documentation

  • Between the NBFC and the PSB, there will be standard assignment documentation.
  • Between the Bank and the GoI:
    • Declaration that requirements of Chapter 11 of the GFR have been satisfied.
    • Guarantee documentation as per format given by GOI

[1] http://pib.gov.in/newsite/PrintRelease.aspx?relid=192618

Other Related Articles :

Government Credit enhancement scheme for NBFC Pools: A win-win for all

Vinod Kothari (vinod@vinodkothari.com)

The so-called partial credit enhancement (PCE) for purchase of NBFC/HFC pools by public sector banks (PSBs) may, if meaningfully implemented, be a win-win for all. The three primary players in the PCE scheme are NBFCs/HFCs (let us collectively called them Originators), the purchasing PSBs, and the Government of India (GoI). The Scheme has the potential to infuse liquidity into NBFCs while at the same time giving them advantage in terms of financing costs, allow PSBs to earn spreads while enjoying the benefit of sovereign guarantee, and allow the GoI to earn a spread of 25 bps virtually carrying no risks at all. This brief write-ups seeks to make this point.

The details of the Scheme with our elaborate questions and answers have been provided elsewhere.

Modus operandi

Broadly, the way we envisage the Scheme working is as follows:

  1. An Originator assimilates a pool of loans, and does tranching/credit enhancements to bring a senior tranche to a level of AA rating. Usually, tranching is associated with securitisation, but there is no reason why tranching cannot be done in case of bilateral transactions such as the one envisaged here. The most common form of tranching is subordination. Other structured finance devices such as turbo amortisation, sequential payment structure, provisions for redirecting the excess spread to pay off the principal on senior tranche, etc., may be deployed as required.
  2. Thus, say, on a pool of Rs 100 crores, the NBFC does so much subordination by way of a junior tranche as to bring the senior tranche to a AA level. The size of subordination may be worked, crudely, by X (usually 3 to 4) multiples of expected losses, or by a proper probability distribution model so as to bring the confidence level of the size of subordination being enough to absorb losses to acceptable AA probability of default. For instance, let us think of this level amounting to 8% (this percentage, needless to say, will depend on the expected losses of respective pools).
  3. Thus, the NBFC sells the pool of Rs 100 crores to PSB, retaining a subordinated 8% share in the same. Bankruptcy remoteness is achieved by true sale of the entire Rs 100 crore pool, with a subordinated share of 8% therein. In bilateral transactions, there is no need to use a trustee; to the extent of the Originator’s subordinated share, the PSB is deemed to be holding the assets in trust for the Originator. Simultaneously, the Originator also retains excess spread over the agreed Coupon Rate with the bank (as discussed below).
  4. Assuming that the fair value (computation of fair value will largely a no-brainer, as the PSB retains principal, and interest only to the extent of its agreed coupon, with the excess spread flowing back to the Originator) comes to the same as the participation of the PSB – 92% or Rs 92 crores, the PSB pays the same to the Originator.
  5. PSB now goes to the GoI and gets the purchase guaranteed by the latter. So, the GoI has guaranteed a purchase of Rs 92 crores, taking a first loss risk of 10% therein, that is, upto Rs 9.20 crores. Notably, for the pool as a whole, the GoI’s share of Rs 9.20 crores becomes a second loss position. However, considering that the GoI is guaranteeing the PSB, the support may technically be called first loss support, with the Originator-level support of Rs 10 crores being separate and independent.
  6. However, it is clear that the sharing of risks between the 3 – the Originator, the GoI and the Bank will be as follows:
  • Losses upto first Rs 8 crores will be taken out of the NBFC’s first loss piece, thereby, implying no risk transfer at all.
  • Losses in excess of Rs 8 crores, but upto a total of Rs 17.20 crores (the GoI guarantee is limited to Rs 9.20 crores), will be taken by GoI.
  • It is only when the loss exceeds Rs 17.20 crores that there is a question of the PSB being hit by losses.
  1. Thus, during the period of the guarantee, the PSB is protected to the extent of 17.2%. Note that first loss piece at the Originator level has been sized up to attain a AA rating. That will mean, higher the risk of the pool, the first loss piece at Originator level will go up to protect the bank.
  2. The PSB, therefore, has dual protection – to the extent of AA rating, from the Originator (or a third party with/without the Originator, as we discuss below), and for the next 10%, from the sovereign.
  3. Now comes the critical question – what will be the coupon rates that the PSB may expect on the pool.
    1. The pool effectively has a sovereign protection. While the protection may seem partial, but it is a tranched protection, and for a AA-rated pool, a 10% thickness of first loss protection is actually far higher than required for the highest degree of safety. What makes the protection even stronger is that the size of the guarantee is fixed at the start of the transaction or start of the financial year, even though the pool continues to amortise, thereby increasing the effective thickness.
    2. Assume risk free rate is R, and the spreads for AAA rated ABS are R +100 bps. Assume that the spreads for AA-rated ABS is R+150 bps.
    3. Given the sovereign protection, the PSB should be able to price the transaction certainly at less than R +100 bps, because sovereign guarantee is certainly safer than AAA. In fact, it should effectively move close to R, but given the other pool risks (prepayment risks, irregular cashflows), one may expect pricing above R.
    4. For the NBFC, the actual cost is the coupon expected by the PSB, plus 25bps paid for the guarantee.
    5. So as long as the coupon rate of the pool for the NBFC is lower than R+75 bps, it is an advantage over a AAA ABS placement. It is to be noted that the NBFC is actually exposing regulatory and economic capital only for the upto-AA risk that it holds.

Win-win for all

If the structure works as above, it is a win-win for all:

  • For the GoI, it is a neat income of 25 bps while virtually taking no real risks. There are 2 strong reasons for this – first, there is a first loss protection by the Originator, to qualify the pool for a AA rating. Secondly, the guarantee is limited only for 2 years. For any pool, first of all, the probability of losses breaching a AA-barrier itself will be close to 1% (meaning, 99% of the cases, the credit support at AA level will be sufficient). This becomes even more emphatic, if we consider the fact that the guarantee will be removed after 2 years. The losses may pile up above the Originator’s protection, but very unlikely that this will happen over 2 years.
  • For the PSB, while getting the benefit of a sovereign guarantee, and therefore, effectively, investing in something which is better than AAA, the PSB may target a spread close to AAA.
  • For the NBFC, it is getting a net advantage in terms of funding cost. Even if the pricing moves close to AAA ABS spreads, the NBFC stands to gain as the regulatory capital eaten up is only what is required for a AA-support.

The overall benefits for the system are immense. There is release of liquidity from the banking system to the economy. Depending on the type of pools Originators will be selling, there may be asset creation in form of home loans, or working capital loans (LAP loans may effectively be that), or loans for transport vehicles. If the GoI objective of buying pools upto Rs 100000 crores gets materialised, as much funding moves from banks to NBFCs, which is obviously already deployed in form of assets. The GoI makes an income of Rs 250 crores for effectively no risk.

In fact, if the GoI gains experience with the Scheme, there may be very good reason for lowering the rating threshold to A level, particularly in case of home loans.

Capital treatment, rating methodologies and other preparations

To make the Scheme really achieve its objectives, there are several preparations that may have to come soon enough:

  • Rating agencies have to develop methodologies for rating this bilateral pool transfer. Effectively, this is nothing but a structured pool transfer, akin to securitisation. Hence, rating methodologies used for securitisation may either be applied as they are, or tweaked to apply to the transfers under the Scheme.
  • Very importantly, the RBI may have to clarify that the AA risk retention by Originators under the Scheme will lead to regulatory capital requirement only upto the risk retained by the NBFC. This should be quite easy for the RBI to do – because there are guidelines for securitisation already, and the Scheme has all features of securitisation, minus the fact that there is no SPV or issuance of “securities” as such.

Conclusion

Whoever takes the first transaction to market will have to obviously do a lot of educating – PSBs, rating agencies, law firms, SIDBI, and of course, DFS. However, the exercise is worth it, and it may not take 6 months as envisaged for the GoI to reach the target of Rs 1 lakh crores.


Other related articles:

An analysis of the Model Tenancy Act, 2019

1.      Introduction

In India, every state has its own law on tenancy matters. The matters, which are not covered by state legislations are governed by the Transfer of Property Act, 1882 (“TPA”), which is central legislation dealing with the matters between tenants and landlords. However, it covers transaction between tenant and landowner in the form of a lease. Codified legislation dealing exclusively on rent related matters in the real estate market has been long ignored in India. Lack of an exclusive legal framework hampered the growth of rental housing segment and resulted in low investments in the rental housing sector. The draft Model Tenancy Act, 2015 was an effort made earlier to codify the law on tenancy. but majority of states never implemented the same. In Union Budget 2019, it was proposed that in order to promote rental housing, new tenancy laws will be formulated to remove the archaic laws currently in use. In furtherance to the said proposition, Ministry of Housing and Urban Affairs (MHUA) released the draft Model Tenancy Act, 2019 (“MTA”) on July 10, 2019, which aims to regulate rental housing by a market-oriented approach while balancing interests of landowner and tenant at the same time. The article points out current problems of rental housing in India along with the issue that how MTA is going to compensate for these problems. It also presents an overview of MTA and loopholes present in it.

2.      Need for rental housing

Housing is one of the basic necessities of life. The rapid pace of urbanization in India has resulted in severe shortage of housing. People go for rental housing because  low-income or people are not ready to build their own house.In spite of government’s prime consideration to affordable housing, many poor households live in congested conditions, which indicates that housing is unaffordable for a large section of population, be it ownership or rental.

The Draft National Urban Rental Housing Policy, 2015 (“the Policy”) pointed out that there is a huge housing shortage in urban areas and on the other hand, there are massive stocks of vacant houses.[1]Possible reasons ascertained for vacant houses could be  low rental yield, fear of repossession, lack of incentives etc. The Policy defines rental housing as a property occupied by someone other than the owner, for which the tenant pays a periodic mutually agreed rent to the owner.[2] The policy suggested that if these vacant houses are made available for rental housing, then some, if not most of the urban housing shortage, could be addressed.[3] Hence, the need for rental housing can be understoodunder the following heads-

  1. An alternative to eliminate the problem of housing shortage in view of ever-increasing population of India.
  2. Prevention of future growth of slums by providing affordable housing to all.
  3. Rental housing could be turned as a steady source of income for the landlords, making investment in rental market attractive.

3.      Current problems of rental housing in India

Rental housing is a subject on which States have exclusive right to legislate. It is a state subject as mentioned under item 18 in List II of Seventh Schedule of the Constitution of India. Although, Central Government can guide the states as we have a quasi-federal structure in India, therefore, Central Government has power to make model law on rent control or tenancy.

At present, nearly every state has its own law governing matters relating to rental housing in their jurisdiction in the name of Rent Control Laws. However, these rent control laws are not adequate to satisfy the need for rental housing in true sense. Because, issues, such as lack of affordable housing, lack of investment in rental housing etc., are still present in the country.

The problems of rental housing in India, as present under different existing rent control laws, can be encapsulated as follow:

  1. Fixation of standard rent:

Existing rent control laws provide for standard rent or fair rent, which is calculated on the basis of cost of construction involved, when the premise was built and does not include present market value of the premise as a consideration to determine standard rent. This proves to be major disincentive for landlords and investors, who want to invest in rental market as it will give very low rate of return.

  1. Overstaying problem of tenants:

Existing rent control laws do not provide for any remedy for when tenants do not vacant the rent premises even after termination of the tenancy period. Therefore, landlords often fear that they might lose control on their premises and had to go long litigation process for recovering their premises.

  1. Reduced liquidity for landlords:

Freeze of availability of rental housing is evident in light of the long litigation proceedings relating to recovery of rental premises by the landlord or proceedings relating to eviction of tenants. When the proceedings are undergoing, it is difficult to rent out the premises which are lis pendens in court of law and thereby it reduces liquidity for landlords in the market.

  1. Security deposit:

From the point of view of tenants, it is unfair to give limitless amount to the landlords in the name of security deposit or pugree. Existing rent control laws do not provide for any upper cap as far as security deposit is concerned and tenants have to suffer in the hands of landlords, who demand lump sum amount as much as they want at the beginning of tenancy period. Because of this practice, poor households choose to live in slum areas as they cannot afford to give arbitrary amount of security deposit, which leads to lack of affordable housing in the Country.

  1. Landlord’s right to evict the tenant on false grounds:

It has been seen in many cases that landlords file false cases to evict tenants on the ground of non-payment of rent because most of the existing rent control laws do no mandate receipt of rent to be given by the landlord.

  1. Lease under Transfer of Property Act, 1882:

Section 105 of the aforesaid Act defines lease as “a lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.” It is to be noted that in case of a lease agreement, terms of the same cannot be changed until the expiry of the lease period unlike tenancy agreement. In practice, landlords often opt for tenancy agreement under rent control laws where they can execute tenancy on a month-to-month basis and can alter its terms.. However, in areas with high vacancy rate of rental premises, landlords choose for lease agreement under Section 105 and thereby make the use of rent control laws fatal. In addition, TPA and rent control laws do not mandate a written agreement to be executed, which is another problem to enforce the rights of either party to the oral agreement and leads to never-ending litigation proceedings in case of disputes.

  1. Leave and License Contract:

Apart from rent control laws and lease under the TPA, people often use leave and license contract as given under the Indian Easements Act, 1882. Section 52 of the said Act defines license as- “where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a license.” Hence, the licensor gives the license to the licensee to use the property, which includes usage same as applicable to rental market without transferring a specific interest in the immovable property. Thus, to execute a landlord-tenant relationship, there exist different contracts under the different names and different procedures, the ambiguities of which can be used by the landlord or tenant to influence the law as per their needs.

4.      Overview of MTA

MTA has been drafted with a view to balance the interests of the landowner and tenant and to provide for speedy dispute redressal by establishing adjudicatory bodies under MTA. It also tries to create an accountable and transparent environment for renting the premises and promotes sustainable ecosystem to various segments of society including migrants, professionals, workers, students and urban poor. To understand what MTA proposes for tenants and landlords, a brief overview has been presented here under the following heads-

4.1       Institutional framework – regulatory and judicial bodies-

Rent Authority-

Section 29 of MTA provides for the appointment of Rent Authority to be an officer who is

not below the rank of Deputy Collector. Rent Authority exercises same power as vested in Rent Court in the following matters-

  1. Upload details of tenancy agreement on a digital platform in the local vernacular or state language in the form prescribed and provide a unique identification number to the parties[4];
  2. Fix or revise the rent on an application by the landowner or tenant[5];
  3. Investigate the case and pass an order in case of deposit of rent by the tenant with the rent authority, if the landowner does not accept the rent[6];
  4. Allow the tenant, if requested, to vacate the premises if it becomes uninhabitable in absence of repairs by the landlord.[7]
  5. Conduct an inquiry and allow compensation or levy penalty in case of an application made to it by the landlord or tenant if any person cuts-off or withholds any essential supply or service in the premises occupied by the tenant or the landowner.[8]

Rent Court and Rent Tribunal-

Section 32 and 33 provides for the constitution of Rent Court and Rent Tribunal respectively. Section 34 gives exclusive jurisdiction to Rent Court and Rent Authority to hear and decide the applications relating to disputes between landowner and tenant and matters connected with and ancillary thereto. For speedy disposal of cases, Rent Court or Rent Tribunal has to dispose the case within 60 days from the date of receipt of the application or appeal and shall record the reasons in writing in case of disposal of case exceeds 60 days period.[9]Appeal from the orders of the Rent Court lies to the Rent Tribunal.[10] In addition, order of Rent Court or Rent Tribunal shall be executable by as a decree of a civil court.[11]Following reliefs can be given by the Rent Court[12]:

  1. Delivery of possession of the premises to the party in whose favor the decision is made;
  2. Attachment of bank account of the losing party for the satisfaction of the amount to be paid;
  3. Appoint any advocate or any other competent person including officers of the Rent Court or local administration or local body for the execution of the order.

4.2       Scope of coverage-

MTA applies to any premises, which is, let separately for residence or commercial or educational use except industrial use.[13] However, MTA does not provide what constitutes residence/commercial/educational/industrial use. Besides, MTA does not apply to the following premises[14]

  1. Hotel, lodging house, dharamshala or inn etc.;[15]
  2. Premises owned or promoted by-
    1. The Central/ State/ UT Government, or
    2. Local Authority, or
    3. Government undertaking or enterprise, or
    4. Statutory body, or
    5. Cantonment board;
  3. Premises owned by a company, university or organization given on rent to its employees as part of service contract;
  4. Premises owned by owned by religious or charitable institutions as may be specified by notification;
  5. Premises owned by owned by any trust registered under the Public Trust Act of the State;
  6. Premises owned by owned by Wakfs registered under the Wakf Act, 1995;
  7. Any other building specifically exempted in public interest through notification.

However, if the owner of any of the premises mentioned under in (b) to (g) wishes a tenancy agreement to be regulated under MTA, then he can inform the same to the Rent Authority.

4.3       Protection of landlord-

As stated above the prime object of the MTA is to eliminate the fear among landlords regarding repossession of their premises and increase the growth of investment in rental sector of the market. Keeping this view, MTA proposes to give protection to landlord in following manner-

  1. Subletting of rented premises cannot be effected without prior consent of landlord in
  2. writing along with disclosure of all details of sub-letting to landlord by the tenant. .[16]
  3. Landlord is allowed to make deduction from security deposit amount for any liability of the tenant.[17]
  4. Landlord is allowed to deduct the amount from the security deposit or can ask the amount payable from the tenant, in case the tenant refuses to carry out scheduled or agreed repairs in the premises.[18]
  5. Landlord can file an application to the Rent Authority against the tenant in case of cut-off or withhold of any essential supply or service in the premises by the tenant.[19]
  6. Landlord can evict the tenant on an application made to the Rent Court on any of the grounds mentioned under Section 21. These grounds are-
  7. Failure of agreement on rent payable;
  8. Failure of tenant to pay the arrears of rent in full and other charges payable unless the payment of the same within 1 month of notice being served on the tenant;
  9. Tenant has parted with the possession of whole or any part of the premises without obtaining the written consent of the landlord;
  10. Tenant has continued misuse of the premises even after receipt of notice from the landowner to stop such misuse;
  11. The premises are required by the landlord for carrying out any repairs, additions, alterations etc., which cannot be carried out without the premises being vacated unless re-entry of tenant has been pre-agreed between the parties;
  12. The premises or any part thereof are required by the landlord for carrying out any repairs, additions, alterations etc. for change of its use as a consequence of change of land use by the competent authority;
  13. Tenant has given written notice to vacate the premises and in consequence of that notice, the landlord has contracted to sell the accommodation or has taken any other step, as a result of which his interests would seriously suffer if he is not put in possession of that accommodation.
  14. In case of overstay of the tenant beyond tenancy period, the landlord is entitled to get compensation of double of the monthly rent for 2 months and 4 times of the monthly rent.[20]
  15. Landlord can make any construction or improvement to the rented premises after permission of the Rent Court obtained in this behalf.[21]
  16. Landlord is allowed to fix or revise the rent payable by the tenant, provided the same should be agreed by the tenant in the tenancy agreement.[22]

4.4       Protection of tenant-

MTA has not only given protection to landlords but balances the interests of the tenants as well. With this view, MTA proposes to give protection to landlord in the following manner-

  1. In the event of death of the tenant, his/her successors will have the same rights and obligations as agreed in tenancy agreement for the remaining period of the tenancy.[23]
  2. Rent cannot be increased during the tenancy period, unless the amount of increase or method for increase is expressly set out in the Tenancy Agreement.[24]
  3. Tenant is entitled to get refund of the security deposit amount at the time of vacating the premises after deduction of amount of liability, if any.[25]
  4. Tenant is entitled to get a written acknowledgment rent receipt by the landlord.[26]
  5. Where the landlord refuses to accept the rent, tenant may deposit it with the Rent Authority.[27]
  6. Tenant is allowed to deduct the amount from periodic rent, in case the landlord refuses to carry out the scheduled or agreed repairs in the premises.[28]
  7. Where the premises becomes uninhabitable and landlord refuses for repairs, thenthetenant has the right to vacate the premises after giving 15 days notice in writing to the landlord or with the permission of the Rent Authority, in case the.[29]
  8. Tenant can file an application to the Rent Authority against the landlord in case of cut-off or withhold of any essential supply or service in the premises by the landlord.[30]
  9. Tenant is entitled to get refund of such an advance amount and interest, in case of default, after deduction of rent and other charges in case of eviction proceedings initiated by the landlord under Section 21.[31]
  10. Tenant may give up possession of the premises on giving a one-month prior notice or notice as required under the tenancy agreement to the landlord.[32]

5.      How will the MTA help rental housing issue?

MTA recommends eradicating the existing rental housing problems by incorporating needful provisions. MTA has recognized the problems in existing rent control laws in its preamble as lack of growth of rental housing segment and lack of the landlords renting out their vacant premises. For better understanding of these needful provisions in MTA, a comparison of key provisions of existing rent control laws and MTA has been produced in Annexure A. In conclusion, the table suggests that MTA provides for market-oriented approach by leaving the fixation of rent amount on parties[33], who may fix or revise it considering current market value of the premises and thereby increasing the possibilities of high rate of return to the investors in the rental housing market. On the other hand, to remove the fear of the landlords of losing possession of the premises has been taken care by MTA by giving a remedy in form of compensation to the landlord[34].

6.      What do the state governments have to do?

As mentioned above, housing is a state subject and States have exclusive right to legislate upon it. MTA proposes only a model on how the issues relating to rental housing as existed under current laws relating to tenancy can be eliminated. It is completely on the states to adopt or not adopt MTA in their state. For better functioning of the rental housing in the state and to resolve the issues as point out above, state should adopt MTA. Moreover, States are free to make amendments in the proposed provisions in MTA while incorporating the same in their states.[35]

7.      What incentives will the state governments have for enacting the MTA?

MTA only proposes a model and States are under no obligation to enact MTA in their respective jurisdictions. Therefore, what the states will get for enacting MTA is equally an important question to consider. Section 46 of MTA provides that if any difficulty arises in giving effect to the provisions MTA, the State/UT Government may, by order, not inconsistent with the provisions MTA, remove the difficulty. Hence, any State enacting MTA is empowered to remove difficulty or amend the provision in their jurisdiction, if there arises any difficulty in implementation of the MTA.

Moreover, housing is one of the basic needs of life and raising the standard of living of its people is one of the primary duties of State as enshrined under the Article 47 of the Constitution of India. Therefore, States shall make every endeavor to resolve the issue of affordable housing in the best manner possible and MTA serves this objective well.

8.      Drawbacks of the MTA

Despite all the good attempts made in the provisions of MTA to remove the current problems relating to rental housing, MTA shortfalls on following grounds:

  1. Moreover, the term ‘Landlord’ covers ‘Lessor’ and the term ‘Tenant’ covers ‘Lessee’ in its definitions, but the MTA nowhere provides that it will override the provisions relating to Lease under the Transfer of Property Act, 1882. Therefore, usage of the term lessor/lessee would create conflict in practice since application of the Transfer of Property Act, 1882 is not clarified under the MTA .
  2. Lodging house and hotels are kept outside the scope of MTA. Therefore, application of the MTA to premises providing paying guest facilities is not clear.
  3. MTA provides for prospective application and gives no redress to tenancies, which are already in existence, prior to the commencement of MTA. Hence, position regarding existing tenancies is left untouched.
  4. Successor-in-interest has not been included in the definition of the term ‘tenant’ under Section 2 (m) of the MTA. However, Section 6 provides for successors of the tenant to come into the shoes of tenant in case of his/her death. This provision creates anomaly that after death of tenant, his/her successor-in-interest may deny acceptance of tenancy agreement on the ground that he/she is not covered within the definition of the term ‘tenant’.
  5. The term ‘rent’ is not defined under the Act, because of which, the form of rent payable is not clear, i.e. whether it has to be necessarily in cash or kind or crops or services rendered.
  6. The MTA does not address the situation in case of failure to execute tenancy agreement, failure to obtain consent of landowner for subletting, failure to refund security deposit at the time of taking over vacant possession of the premises by the landlord, failure to observe obligations imposed on parties. Although specific establishment of adjudicatory bodies has been provided under the MTA but the same results in increase of litigation matters before judicial bodies established under the MTA.
  7. MTA is open to be adopted by the States and does not necessarily impose application of its provisions to State.
  8. MTAdoes not talk about weak bargaining power of tenants and allows parties to agree on rent amount, which may cause prejudice to weaker sections of the society.
  9. MTA does not talk about over-riding effect of MTA on existing laws on tenancy, lease under the TPA, license under the Indian Easements Act, 1882 to uphold the objectives of the MTA.

9.      Conclusion

MTA is a welcoming step in rental matters relating to any premises. Establishment of the adjudicating authorities is going to lessen the burden on lower courts in the country in the matters relating to tenancy. However, application of the MTA would be interesting to see as to how many states actually implement MTA because it is only a model and not mandatory for states to adopt it.

 

 

Annexure-A

Comparison of Existing Rent Control Laws and MTA:

The author has tried to analyze some of the major existing rent control laws[36]in comparison with the MTA. The same has reproduced in a table form below:

Point of difference Existing Laws MTA Comments
Purpose of the Act 1.      Control of rent and protection of tenant from payment of rent more than the standard rent, and

2.      Protection of tenants from eviction,

 

It provides not only for protection of tenants but also provides for protection of landowners. Most of the existing rent control laws are tenant-centric; whereas MTA balances the interests of landowner and tenant.
Exemption  Premises belonging to the Government are exempted but no specific provision is present regarding exemption of religious or charitable premises and premises owned by a university except Maharashtra Rent Control Act, 1999.[37] MTA exempts any premises owned by the Government, religious or charitable institutions, and premises owned by a company, university or organization given on rent to its employees as part of service contract.[38] MTA applies to all kind of government occupied premises and publicly used premises unlike existing rent control laws.

 

Definition of ‘Landlord’ If the premises were let to a tenant then landlord means a person who-

1.      is receiving, or is entitled to receive the rent of any premises, or

2.      trustee, guardian or receiver, who is receiving or is entitled to receive rent, on behalf of, or for the benefit of, any other person who cannot enter into a contract (such as minor, person with unsound mind etc.).

 

If the premises were let to a tenant then landlord (Landowner/Lessor) means a person who[39]

1.      is receiving, or is entitled to receivethe rent of any premises,and

2.      includes successor-in-interest,

3.      trustee, guardian or receiver, who is receiving or is entitled to receive rent, on behalf of, or for the benefit of, any other person who cannot enter into a contract (such as minor, person with unsound mind etc.).

MTA covers Lessor within the term ‘Landlord’ and includes successor-in-interest unlike existing rent control laws.

 

Definition of ‘Premises’ Premises mean any building or part of a building rented out, and includes-

1.      Gardens, garages or outhouses, any furnituresupplied by the landlord,

2.      any fittings affixedto such building.

However, premises do not include hotel, lodging house.

 

 

Premises mean any building or part of a itrented out for the purpose of residence or commercial or educational use, (except for industrial use) and includes[40]

1.      the garden, garage or closed parking area, grounds and out-houses, appertaining to such building or part of the building,

2.      any fitting to such building or part of the building for the more beneficial enjoyment thereof,

However, premises do not include hotel, lodging house, dharamshala or inn etc.[41]

State RCAs do not explicitly exclude industrial use, unlike MTA and do not specifically recognize a particular purpose of use of building to be cover within the term ‘premises’.
Definition of ‘Tenant’ Some of the rent control laws do not provide definition of term ‘tenant’. And others include tenant as a person-

1.      who is paying the rent, or

2.      deemed tenant, or

3.      sub-tenant,

4.      member of tenant’s family in case of death of tenant.

Tenant/Lesseemeans a person[42]

1.      by whom the rent is payable, or

2.      on whose behalf the rent is payable, and

3.      includes a sub-tenant,and

4.      any person continuing in possession after the termination of his tenancy whether before or after the commencement of this Act.

However, tenant does not include any person against whom any order or decree for eviction has made.

MTA does not include successor-in-interest within the definition of tenant.
Standard rent Standard rent means a rent fixed by the Controller under rent control laws. No provision is made. MTA does not provide for the definition of the term ‘rent’.
Tenancy agreement It was not necessary and tenancy can be affected even without entering into tenancy agreement. It means a written agreement executed by the landowner and the tenant.[43] Moreover, it is mandatorycondition for a tenancy to come into effect.[44] MTA making the tenancy agreement mandatory unlike existing rent control laws.
Sub-letting No provision regarding prior written consent of landlord for sub-letting by tenant. Prior written consent of the landowner is madecompulsory.[45] More stringent provision.
Fixation of rent Rent fixed (standard rent) based on the value of land andcost of construction when built. The rent is the amount agreed between the landowner and the tenant as per the terms of the tenancy agreement.[46] Standard rent or fair rent concept has removed in MTA.
Increase in rent It is unilateral by the landlord with the approval of the controller. Revision of rent between the landowner and the tenant shall be as per the terms set out in the Tenancy Agreementor on a prior 3 months notice to the tenant.[47] Mutually agreed increase in rent is provided under MTA unlike rent control laws.
Temporary recovery of possession The landlord is entitled to get possession of the building, if bona fide, it is required by him to carry out repairs, alterations or additions, which cannot be carried out without the building being vacated, after which the building will again be offered to the tenant.

 

Rent Court may on an application made to it, make the order that the landlord is entitled to get possession of the premises or any part thereof on account of any repairs or rebuilding or additions or alterations or demolition, which cannot be carried out without the premises being vacated, provided that such re-possession has to be mutually agreed to between the landowner and the tenant and the new tenancy agreement has to submitted with the Rent Authority.[48] More requirements that are stringent have been put on the parties under MTA.
Deposit of rent Many of state rent control lawsdo not provide for deposit of rent lawfully payable to the landlord in respect of the building, before the authority as may be prescribed. Explicit provision provided for deposit of rent with the Rent Authority where the landowner does not accept the rent or refuses to give a receipt or if landowner does not accept the rent.[49] Transparency and accountability enabled provision.
Overstay of tenant No deterrent provision, therefore landlords fear to give their houses on rent, which in turn reduces the supply of renting houses in the market. It provides for compensation i.e. four times the rent, to the landlord.[50] MTA provides Remedy in favour of landlord.
Rent Receipt on payment of rent No provision. Every tenant is entitled to get a written receiptfrom the landowner for the amount paid to him.[51] Tenant friendly provision to eliminate abuse against tenants.
Security deposits No explicit provision existed for security deposits/ pugree in addition to rent. MTA provides for 2 months’ rent in residential property, 1-month rent in non-residential property as security deposit.[52] MTA provides elimination of abuse against tenants.
Inheritance of tenancy Order of inheritance has provided in most of the state RCAs. No order of successors has given in MTA.[53] MTA introduces more wide import in case of inheritance of tenancy.
Structural alteration to the rent premises Rent control laws provide for structural alteration without consent of tenant and increase rent. MTA provides for structural alteration to rent premises only if the same is provided in the  agreementwith the tenant and increase the rent.[54] Tenant friendly provision to eliminate abuse against tenants.
Adjudicatory Authority Controller or Civil Courts Rent Authority, Rent Court, Rent Tribunal[55] Specific adjudicatory bodies introduced in MTA for speedy disposal of rent related matters.

 

 

 

[1]Draft National Urban Rental Housing Policy, 2015, p 10.

[2]Id. At p 5.

[3]Id.

[4] Section 4 (4), MTA, 2019.

[5] Section 10, MTA, 2019.

[6] Section 14 (2), MTA, 2019.

[7] Section 15 (5), MTA, 2019.

[8] Section 20, MTA, 2019.

[9] Section 35 (2), MTA, 2019.

[10] Section 37, MTA, 2019.

[11] Section 36 (7), MTA, 2019.

[12] Section 38 (1), MTA, 2019.

[13] Section 2 (e), MTA, 2019.

[14] Section 3, MTA, 2019.

[15]Id.

[16] Section 7, MTA, 2019.

[17] Section 11 (2), MTA, 2019.

[18] Section 15 (3), MTA, 2019.

[19] Section 20, MTA, 2019.

[20] Section 22, MTA, 2019.

[21] Section 25, MTA, 2019.

[22] Section 8 & 9, MTA, 2019.

[23] Section 6, MTA, 2019.

[24] Section 9 (4), MTA, 2019.

[25] Section 11 (2), MTA, 2019.

[26] Section 13 (2), MTA, 2019.

[27] Section 14, MTA, 2019.

[28] Section 15 (4), MTA, 2019.

[29] Section 15 (5), MTA, 2019.

[30] Section 20, MTA, 2019.

[31] Section 23, MTA, 2019.

[32] Section 28, MTA, 2019.

[33] Section 8, MTA, 2019.

[34] Section 22, MTA, 2019.

[35] Section 46, MTA, 2019.

[36]Maharashtra Rent Control Act, 1999; Delhi Rent Control Act, 1958; Andhra Pradesh Buildings (Lease, Rent and Eviction) Control (Amendment) Act, 1960; The West Bengal Premises Tenancy Act, 1997.

[37] Section 3, Maharashtra Rent Control Act, 1999.

[38] Section 3, MTA, 2019.

[39] Section 2(b), MTA, 2019.

[40] Section 2(e), MTA, 2019.

[41]Id.

[42] Section 2(m), MTA, 2019.

[43] Section 2(a), MTA, 2019.

[44] Section 4, MTA, 2019.

[45] Section 7 (1), MTA, 2019.

[46] Section 8, MTA, 2019.

[47] Section 9, MTA, 2019.

[48] Section 9 (6), MTA, 2019.

[49] Section 14 (1), MTA, 2019.

[50] Section 22, MTA, 2019.

[51] Section 13 (2), MTA, 2019.

[52] Section 11, MTA, 2019.

[53] Section 6, MTA, 2019.

[54] Section 9 (6), MTA, 2019.

[55] Chapter VI & VII, MTA, 2019.

Union Budget 2019-20: Impact on Corporate and Financial sector

Revised Guidelines on KYC & Anti-Money Laundering Measures for HFCs