When investing in a real estate project, buyers often trust big, well-known builder names. These companies build their reputations over years and project an image of reliability and quality. However, not everything that glitters is gold. A troubling practice is becoming more common in the real estate market, leaving homebuyers and investors vulnerable: builders registering projects under their subsidiary companies while cleverly distancing themselves from legal liabilities.
Here’s how this practice works and why you should be cautious:
How Builders Use Subsidiary Companies as Promoters
To begin with, builders create subsidiary companies, which are legally separate entities but are fully owned or controlled by the parent builder company. Once this subsidiary company is established, the builder registers new real estate projects under its name with RERA (Real Estate Regulatory Authority). This means that on paper, the subsidiary becomes the official “promoter” of the project—not the well-known parent builder.
Now, here’s where the shady part comes in:
- The parent builder signs a Memorandum of Understanding (MoU) with its subsidiary. This MoU often includes a clause allowing the subsidiary to use the parent company’s name, logo, and branding for marketing purposes.
- As a result, homebuyers and investors are tricked into believing that the project is being launched and backed by the established, reputed parent builder company.
The Hidden Clause: Shielding the Parent Builder
While this setup may look harmless at first glance, a critical clause is often buried in the MoU. It states that if there are financial irregularities, fraud, or legal issues related to the project, the parent builder will not be held responsible. Instead, the subsidiary company—the official promoter under RERA—will bear the full responsibility.
This creates a serious risk for homebuyers and investors because:
- Subsidiary companies are often under-capitalized and may not have the financial strength to deal with lawsuits or compensation claims.
- If the subsidiary becomes bankrupt or vanishes, buyers are left with no recourse.
- The parent company, despite its branding being used to attract customers, can wash its hands of all legal or financial liabilities.
Why Do Builders Do This?
The main reason builders use this tactic is to protect themselves from risk. By distancing the parent company from direct legal responsibility, they can:
- Continue protecting their brand reputation, even if the project runs into trouble.
- Avoid financial liabilities in case of delays, quality issues, or fraud.
- Shift blame entirely onto the subsidiary, making it difficult for buyers to seek justice.
How to Protect Yourself as a Homebuyer or Investor
Here are some steps to safeguard yourself from falling into this trap:
- Check the RERA Registration Details: Always verify which company is listed as the promoter of the project. RERA details will provide the name and background of the actual promoter.
- Research the Subsidiary Company: If a project is promoted by a subsidiary, investigate its financials, track record, and ownership. Often, subsidiaries are newly formed entities with no history or credibility.
- Ask About the Relationship Between the Parent and Subsidiary: Don’t hesitate to ask for transparency. Who is backing the project financially? Will the parent company take responsibility for delays, quality issues, or refunds?
- Read the Fine Print in Agreements: Pay close attention to clauses in agreements or MoUs, especially concerning branding and liability. If the parent builder has distanced itself legally, this is a red flag.
- Consult a Legal Expert: Before making any payments, consult a lawyer to review the project’s legal structure. A professional can help uncover hidden risks. MyFloorArea can support you with our inhouse legal expert team.
Transparency is Key in Real Estate
Homebuyers and investors deserve transparency when investing their hard-earned money in real estate. Practices like using subsidiaries to dodge accountability erode trust in the industry and leave buyers vulnerable. As a consumer, always do your due diligence and stay informed about the tricks some builders use to sidestep their responsibilities.
At myfloorarea.com, we believe in empowering homebuyers with accurate information so they can make confident and informed decisions. If you have any questions about a project or need guidance, don’t hesitate to reach out to us!