Supreme Court Issues Notice to RBI on Real Estate Audit Petition

NEW DELHI – The Supreme Court has issued a notice to the Reserve Bank of India (RBI) on a petition seeking a direction to conduct a supervisory review or comprehensive audit of all banks' exposure to real estate projects. The petition, filed by Vandana Sabharwal, a homebuyer, alleges that funds collected from homebuyers are being diverted by real estate companies for non-construction purposes and siphoned off to related group entities.

The bench led by Chief Justice of India Surya Kant acknowledged that the petition involves a complicated issue and needs to be examined thoroughly. The apex court has also sought responses from the government, real estate regulatory bodies, land authorities, Jaiprakash Associates Ltd., Standard Chartered Bank, and others on the petition.

Sabharwal's petition seeks a direction to Adani Enterprises Ltd., the successful resolution applicant for Jaiprakash Associates, and Suraksha Realty, the successful resolution applicant for Jaypee Infratech, to file avoidance applications before the National Company Law Tribunal (NCLT) in respect of all identified undervalued external developer transactions. If any such avoidance application is allowed by the NCLT, the apex court should direct that the recovered land or development rights be returned to the respective resolution estate and subjected to a fresh, transparent, court-supervised open-market auction. The auction proceeds, to the extent they represent value over and above the consideration offered by the respective resolution applicants, should be utilized accordingly.

An avoidance application under the Insolvency and Bankruptcy Code, 2016, empowers resolution professionals or liquidators to 'claw back' assets from unfair, pre-insolvency transactions. These applications are filed before the NCLT to reverse illegal asset stripping and maximize creditor recovery.

According to the Enforcement Directorate's prosecution complaint, INR 145.99 billion collected from homebuyers was diverted by Manoj Gaur, the executive chairman of Jaiprakash Associates, to group entities, including Yamuna Expressway Infrastructure, through systematic non-compliance with RERA's escrow, disclosure, and registration requirements.

The petitioner has also sought directions to real estate regulatory authorities to conduct a project-wise audit of escrow accounts, which should be mandatory and continuously monitored. Additionally, the petition calls for the completion of a probe by the Enforcement Directorate against various real estate developers on the diversion of funds.

Furthermore, the petition seeks a direction to the RBI to conduct a focused supervisory audit of Standard Chartered Bank and all consortium lenders to Jaiprakash Associates and Jaypee Infratech, specifically to determine whether adequate end-use monitoring was conducted on funds lent against Jaypee project lands.

At 1328 IST, the shares of Adani Enterprises Ltd. traded 0.6% lower at INR 2,952.70 on the National Stock Exchange. IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT.