Property Frauds – Horrors of Non-corporate ownership of property and Financing
Financing – the most important part of any economy, business, household. The way you arrange for funds and manage them.
Got money? Want to invest as part of your financial planning – The real estate looks promising – Want to earn extra bucks – Buying a property – BE ALERT! BE AWARE! It may turn into a nightmare.
Let’s see how?
Thanks to our weak regulations, poor IT infrastructure and lack of information with the general masses.
Buying a property involves the following basic parameters –
- The Location and the Price,
- The Ownership and the Right to Alienation; and
- Any Debts against the property i.e. encumbrance on the property.
The location and price is a matter of economic judgment. However, the rest calls for legal knowledge and professionalism which is out of reach of many. The Ownership titles and the right to alienation are established by searching property records – generally carried out by lawyers – at the Sub-Registrar’s Office, which involves checking the owners’ name in the Registrar’s and Municipality records (Ownership & Mutation).
The grey area lies in the important factor of liabilities against the property i.e. the encumbrances on the property, the debts or loans taken against the property, like a term Loan, working capital loan, housing loan or demand loan, especially in case of loans against property mortgaged by way of deposit of title deeds.
In India, the corporates (the companies registered under Companies Act, 1956 or 2013) are regulated by the Ministry of Corporate Affairs (MCA). Every company which avails a bank loan against any property owned by the company as security needs to create a charge with the Registrar of Companies (ROC), and only then the loan is treated as secured.
The MCA maintains a database of all the assets charged by companies and the information is available to the public at nominal fees. The banks before lending can check if the property has already been mortgaged at any point of time in the past. These days the banks generally insist for a ROC search report from a Chartered Accountant with detailed analysis on the property. Similarly, even the buyer of property can search for the same at the MCA portal before buying any property from any of the body-corporate. Thus, the buyer and the lender is safe from any kind of frauds related to mortgage. Once the loan is repaid and the property is free from encumbrances, the company is required to file a Satisfaction of Charges with the Registrar of Companies and only then the property is said to be free from encumbrances.
The Grey Area
The problem lies in case of non-corporate, be it an individual or a partnership firm. In case of an individual or joint-owners of a property, there is no regulatory authority which keeps the records or controls the loans taken against properties owned by them. A major drawback of mortgage in this method is that the charge created on the property remains known only to the lender and the borrower. The mortgage created will not be recorded with any government authority and hence in all government records, property mortgaged by way of deposit of title deeds remains unencumbered. The EC (Encumbrance Certificate) issued by the Sub Registrar Office or search report conducted by an advocate will not be able to ascertain the charge created by deposit of title deeds.
This loophole in the mortgage process has encouraged people with dubious character to take multiple loans same property from different banks and lenders. Such people have deposited original title deeds in one bank for the first loan and later on by claiming that they have lost the originals, have managed to obtain a number of loans on certified copies of title deeds with other banks and lenders. Scandalous-minded people have gone further and have created fictitious title documents and obtained multiple loans on one property. Further, many fraudsters having good relationship with the Bank Managers manage to get the Original Deeds back after disbursement of loans thereby ready for a new loan against the same property.
In one instance, Mr. Agarwal (fictitious) bought a residential flat from an individual, got the property searched and after confirming that it was duly registered in the seller’s name, he paid the agreed amount to the seller. On getting the original deed, he went to a private sector bank for loan against the same.
Coincidently and unfortunately, the same property was mortgaged in the same bank and branch in the name of the seller. But now the seller was away with the money duping Mr. Agarwal as well as the bank. On enquiry neither the seller could be traced nor any clarity could be obtained on how he had the original title deeds even after availing an equitable mortgage loan.
Some unscrupulous operators have hoodwinked many flat purchasers by mortgaging the entire plot of land for project finance and selling the flats constructed on it without repaying the loan and have vanished from the scene. Even many leading banks and lenders have granted loans on such flats without the knowledge of existing mortgage on the entire property. This can be perceived as a big mistake from the part of the banks as well, but this has been happening since long because of the faulty laws and less stringent regulations.
Thousands of innocent people have been cheated by deceptive people who sold such property which were already mortgaged to banks/HFCs. The innocent buyers have to undergo hardships at the cost of weak laws. On the other hand, lenders are also put to a lot of troubles in recovering debts, due to multiple funding on the same property. When home loan disbursals increased from a few thousand crore rupees per annum in the late 1990s to more than lakhs crore rupees per annum in a span of a decade, such frauds significantly increased the non-performing assets(NPAs), eroding profits of lenders and damaging the finance system of the country.
To overcome the menace of multiple funding and keeping away willful defaulters from the financial system, the Union Government had contemplated to establish a central registry of mortgages under chapter IV of SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, which was promulgated in 2002.
Accordingly, the Central Government has set up CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India), with effect from March 31, 2011. CERSAI is a Government company with 51 per cent equity from the Central Government and the remaining is held by selected public sector banks and the National Housing Bank (NHB). The Registry works under the provisions of the SARFAESI Act.
The CERSAI maintains a central registry of property on which loans have been availed. It developed an online system which can be accessed by financial institutions and general public to get the information on mortgaged property, the amount secured by the charge on the collateral, history of charges created and satisfied on a particular property. This move will enable lenders to get real-time information regarding the security offered by the borrower, providing the potential buyers information about any encumbrance on the property they intend to buy, preventing fraudulent transactions arising out of the same asset being mortgaged to multiple lenders.
The Central Government has made it mandatory for all banks and financial institutions to register the mortgage created (security interest over property to secure loans) with CERSAI, within 30 days of creation of mortgage. The banks and financial institutions can access the central registry website by paying the prescribed fee and verifying whether there are any encumbrances over the property to be funded.
As per the provisions of CERSAI, public will be able to verify the records to check whether there are any mortgages existing on the property they intend to buy. One can expect that very soon, by paying a nominal fee say Rs.50, any individual can search the records of CERSAI while buying a property and get assured about zero encumbrances on the property. However, the public will have to access CERSAI through an authorized intermediary like bank, HFC or a financial institution approved by it.
With the setting up of CERSAI, it would be virtually impossible for any borrower to raise loans twice or more against the same property or raise loans using forged documents.
Some of the basic details about CERSAI and its operation as per CRESAI website:
The Central Government has notified the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 (Central Registry Rules) with effect from 31st March 2011.
In terms of the provisions of the said Rules, the Forms have been prescribed for the purposes of registration of following transactions with CERSAI: (i) Creation of mortgage by deposit of title deeds in favour of secured creditors: Form-I (ii) Satisfaction of Charge : Form-II (iii) Securitisation or Reconstruction of Financial Assets: Form-III (iv) Satisfaction of Securitisation or Reconstruction of Financial Assets : Form-IV
It can be seen from the provisions of the Central Registry Rules that no forms have been prescribed for registration of charges other than mortgage by deposit of title deeds. Hence at present, the secured creditors are required to file particulars of only equitable mortgages with CERSAI.
The Registration System has become effective from 31st March 2011. All security interests by way of creation of mortgage by deposit of title deeds and transactions of securitisation and asset reconstruction on and after 31st March 2011 are required to be registered. The relevant rules have not been given retrospective effect and hence transactions of mortgages or securitisation or asset reconstruction undertaken prior to 31st March 2011 are not required to be registered. If in any loan accounts, there is a release and re-deposit of title deeds on or after 31st March 2011 amounting to creation of mortgage, such transaction will require registration.
The Central Registration system established under the SARFAESI act is in addition to and supplemental to other registration system already in operation under other laws such as the Companies Act 1956 or Registration Act, 1918. The registration under the SARFAESI Act does not in any way affect or change the requirement of registration under other laws. One may refer to sub-section (4) of section 20 of the SARFAESI Act.
The irony here is that if any property is mortgaged before 31st March 2011, the same cannot be verified; therefore relying totally on the CERSAI register may not help. Better late than never, it is a welcome move and will lead to curbing frauds and help the citizens of India from becoming victims of the fraudulent.
We, Chartered Accountants, as partners in nation building can play a pivotal role in curtailing the frauds by educating our clients, banks and general public about the control and procedures of the registry. This will not only lead to our growth, but the growth of the system as well. Focusing only on profitability or quantitative factors will not benefit the customers in long run as there is no sustainable growth for anyone in the same.