Sunday, 29 March 2015

Redevelopment: Why Bank Guarantees are taken non-seriously

16 December 2013, Mumbai: Last week, with some journalism students, I went for an RTI inspection of files at Railway Vikas Nigam Limited (RVNL). We inspected documents about the construction of new Oshiwara railway station – a modest-sized job of Rs 8 to 14 crore each for two contractors, with 12 to 16 months project duration. In scale and duration, I feel that this project is comparable to large building redevelopment projects. For me personally, reading RVNL’s tightly-drafted contract, certificates of creditworthiness and Performance Guarantees taken from the contractors was an eye-opener. It helped me to understand how cooperative housing societies could ideally be safeguarding themselves… but tragically fail to do so.

This government company’s legal consultants vetted the wordings of the bank guarantees, and certified them as legally correct for safeguarding their own interests. And looking at these, I was trying to even imagine, leave alone remember, a housing society that takes such precautions to safeguard the future financial well-being of its own members. Sadly, I was unable to do so.

“Uncooperative” housing societies, consisting of argumentative individuals habitually pitted against one another, always accept whatever clauses the developer and his lawyers include – and therein lies the tragedy. The builder usually gives Financial Bank Guarantees, which are more generalized and less safe than Performance Guarantees, and succeeds in safeguarding his own commercial interests, while giving the society a babaji-ka-thullu.

Housing societies, their office-bearers and their members generally have no idea of the financial risks that are being loaded on them. Chronically unwilling to spend money on and accept advice from serious legal professionals (as against aloo-chaaloo advocates), they accept unnecessary risks with a fatalistic statement: jo sabka hoga, woh hamara hoga. (Only those who have been living away from their houses for many years – usually without rent-allowance from builders – have any idea of the seriousness of these dealings; only they understand the mistake of entering into such dealings casually, as if they are playing cards!)

In every society, there are usually one or two individuals who understand the risks, and oppose the faulty paperwork tooth-and-nail. But the office-bearers usually paint such persons as troublemakers, and the silent sheepish majority keeps quiet while they are harassed, isolated and crucified.

The lack of legal thinking and financial rigour in housing redevelopment projects strikes me like a stone in the eye. When I see the amount of planning, paperwork and mandatory reporting that a government company like RVNL includes in its project parameters, the paperwork done by housing societies (even where government entities like MHADA are involved) appears like rubbish! In fact, the strangest thing is that many office-bearers go out of their way to include clauses in the Development Agreement, Bank Guarantee etc. for penalizing society members, and safeguarding the interests of the builders! Anxious to release the builder from their commitments under the bank guarantees at the earliest possible time, they downplay the need for enforcing performance of the builder’s contractual obligations.

Project Management Consultants and society office-bearers take advantage of our habitual errors and mistaken beliefs, to push forward a deal where the redeveloper’s duties and actions are not clearly defined. Questions raised in the general body meetings are brushed aside.

Sadly, the judiciary has also taken this stance. Quite often, when such questions of financial due-diligence have been raised through writ petitions, the High Court has brushed aside these questions raised by the critical-minded minority, and upheld the herd mentality of the majority. By doing so, it has repeatedly deprived individuals of their right to exercise due diligence for safeguarding the shelter and financial security of their own families, and sent out a wrong message. Shame!

Warm Regards,
Krishnaraj Rao
98215 88114

OTHER ARTICLES for people who question and oppose faulty redevelopment:

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