Introduction
The Rise of a Hidden Real-Estate Financial Scam
India’s real-estate sector has witnessed multiple layers of financial manipulation in the past decade, but the subvention scheme controversy has emerged as one of the largest and most complex banking–builder frauds involving thousands of homebuyers. The scheme was marketed as a dream solution for middle-class buyers who wished to purchase under-construction properties without the burden of immediate EMI payments. Builders promised that they would pay the pre-EMI interest until possession and that buyers needed to pay only the booking amount. Banks and housing finance companies disbursed massive portions of sanctioned loans upfront to builders on the basis of tripartite agreements. In theory, this arrangement appeared to be a win-win model for all parties. In reality, however, it turned into a nationwide financial crisis that eventually reached the Supreme Court of India.
The landmark judgment in Himanshu Singh v. Union of India (2025) exposed the large-scale irregularities, regulatory breaches, and structural collusion between banks, builders, and development authorities. The Court described this entire system as an “unholy nexus”, prompting a CBI probe into the operation of subvention schemes across NCR and other regions. This article provides a detailed legal analysis of how the scam operated, why it remained undetected for years, and how the Supreme Court’s intervention may redefine accountability in the real-estate and financial sectors.
Understanding the Subvention Scheme
A System Designed for Exploitation
A subvention scheme is essentially a tripartite financial model where the buyer, builder, and lending institution sign a joint agreement. The buyer pays a small percentage, typically 5–10% of the property value, and the bank sanctions the housing loan. Instead of releasing loan amounts in a construction-linked manner, several banks disbursed 70–90% of the loan upfront directly to builders. Builders then paid the pre-EMI interest on behalf of the buyer until possession.
Theoretically, this arrangement ensured that builders received funds for construction, banks earned interest, and buyers did not suffer EMI burden until possession. However, the structure contained several blind spots. Builders misused funds, diverted them to unrelated projects, defaulted on paying pre-EMIs, abandoned construction, or declared bankruptcy. Banks then shifted the entire financial liability back onto the unsuspecting homebuyers despite the fact that the buyers had neither taken possession nor defaulted themselves. This nature of the scheme created a situation where buyers were trapped between incomplete projects and aggressive loan recovery mechanisms.
The Genesis of the Scam
How Builders and Banks Benefited
Builders benefited almost instantly from the scheme because they received upfront capital without delivering proportional construction. Instead of using disbursements strictly for project development, many diverted funds toward land purchase, debt clearance, advertisements, or unrelated ventures, leaving the project structurally starved of capital. The absence of real-time monitoring, combined with lax audits by financial institutions, allowed builders to operate unchecked.
Banks and housing finance companies also benefited significantly. By sanctioning larger upfront disbursements, they increased their loan portfolios rapidly. The interest burden during the pre-EMI period was paid by builders, which meant banks faced minimal risk. In fact, banks gained double advantages: large-scale loan disbursement and guaranteed interest inflow during the construction period. They effectively transferred the long-term risk to buyers, who would eventually bear the loss if the project stalled.
This coordinated financial structure essentially trapped consumers into a cycle of dependency. Builders received liquidity, banks expanded portfolios, but buyers were left exposed to systemic risk without adequate regulatory protection.
The Role of Authorities
Regulatory Lapses and Administrative Blindness
One of the most critical aspects exposed in the Supreme Court proceedings is the failure of development authorities and regulatory bodies to enforce compliance. Authorities such as NOIDA, Greater NOIDA, YEIDA, Ghaziabad Development Authority, and Haryana’s urban development agencies granted approvals and registered projects without ensuring financial discipline. They failed to verify whether funds disbursed by banks were being used solely for construction or whether projects complied with mandated timelines and contractual obligations.
Regulatory bodies like RERA were intended to function as safeguards for homebuyers. However, disclosures on RERA portals were incomplete, outdated, or misleading. Many ongoing projects displayed unrealistic timelines, false progress reports, and non-compliant financial statements. The lack of coordination between lending institutions, builders, and regulatory authorities further deepened the crisis, enabling the scam to continue for years before reaching judicial scrutiny.
Supreme Court’s Characterisation
The “Unholy Nexus”
In the 2025 judgment, the Supreme Court used the term “unholy nexus” to describe the collusive operation between banks, builders, and authorities. The Court observed that lending institutions continued to release funds despite clear violations of RBI and NHB guidelines, which mandated construction-linked disbursement and periodic verification of project progress. Instead of exercising caution, banks facilitated builders by providing upfront loans disproportionate to construction stages.
Simultaneously, several builders misrepresented project status, delayed construction intentionally, or diverted funds. Development authorities overlooked compliance, and regulators failed to intervene at crucial stages. As a result, homebuyers faced coercive recovery actions, including notices, legal proceedings, and even warrants under Section 138 of the Negotiable Instruments Act, despite being victims of the fraud.
This unified system of misconduct is what the Court termed the “unholy nexus,” reflecting a deeper institutional failure rather than isolated acts of wrongdoing.
CBI Investigation Ordered
Scope and Structure
Recognising the magnitude of the scam, the Supreme Court directed the CBI to conduct a nationwide probe covering multiple builders, banks, and authorities. The Court ordered the registration of seven preliminary enquiries (PEs) across NCR and outside regions, including Mumbai, Kolkata, Mohali, and Bangalore.
The CBI was directed to examine:
- Patterns of loan disbursement across multiple banks and HFCS.
- Compliance with RBI–NHB guidelines.
- Misuse of funds by builders and developers.
- Irregularities in tripartite agreements.
- Complaints of coercive recoveries from buyers.
- Failures of development authorities in monitoring construction.
- The role of real-estate intermediaries and shell entities.
The Court also mandated the appointment of nodal officers from all concerned authorities and regulators, ensuring seamless access to data and administrative support. This structured investigation indicates that the Court intended to uncover the full extent of institutional collusion, including possible criminal wrongdoing such as cheating, conspiracy, and money laundering.
Legal Implications for Banks
Accountability and Compliance Failures
Banks and HFCs may face serious legal consequences for violating RBI’s prescribed norms on construction-linked lending. Their actions may constitute negligence, breach of fiduciary duty, and violation of consumer protection principles. If investigations establish deliberate collusion with builders, charges of criminal conspiracy or financial fraud may also arise. The Court’s focus on banks’ unjustified disbursements reflects a significant shift toward holding financial institutions accountable for systemic failures.
Future implications may include penalties, cancellation of fraudulent agreements, stricter lending guidelines, and mandatory reporting mechanisms. Banks may also be required to restructure existing loans or offer relief to affected homebuyers.
Consequences for Builders
Misappropriation and Criminal Liabilities
Builders who diverted funds or delayed construction without justification may face prosecution under multiple laws including the IPC/BNS, RERA, Consumer Protection Act, and Prevention of Money Laundering Act, depending on the nature of the diversion. The Supreme Court’s intervention indicates that the judiciary is now prioritising accountability for developers who misled buyers or abused financial mechanisms under the Subvention Scheme.
Builders may be compelled to refund amounts, complete stalled projects, or face criminal investigation for cheating and breach of trust. Moreover, the Court has clarified that costs incurred by authorities and the CBI during investigation may ultimately be recovered from developers.
Impact on Homebuyers
Legal Protections and Remedies
Homebuyers who have suffered financial loss due to stalled projects or coercive recovery actions may be entitled to several legal remedies. These include:
- Protection from coercive loan recovery actions.
- Relief from EMI payments until possession.
- Damages for delay and mental harassment.
- Refunds with interest for abandoned projects.
- Priority in insolvency proceedings.
- Compensation through consumer courts or RERA authorities.
The judgment also ensures that no buyer can be treated as a defaulter when the delay originates from the builder or from irregular loan disbursement by financial institutions.
Structural Reforms Needed
Preventing Future Subvention Scams
To prevent recurrence of such systemic fraud, India requires more stringent financial regulations governing real-estate lending. Banks must adhere strictly to construction-linked disbursement models and verify project status through independent audits. RERA must strengthen disclosure mechanisms and ensure greater transparency in project finances. Development authorities must exercise vigilant oversight and verify whether funds are being used exclusively for construction.
There is also a need for a centralised monitoring system that coordinates information between RERA, banks, and development authorities. Mandatory escrow accounts, prohibition of upfront disbursement, and criminal liability for wilful default by developers are essential reforms moving forward.
Conclusion
A Turning Point in India’s Real-Estate Regulation
The Supreme Court’s intervention in Himanshu Singh v. Union of India marks a historic moment in the legal and regulatory landscape of India’s housing sector. By acknowledging the coordinated misconduct between banks, builders, and authorities, and ordering a CBI investigation into the subvention scheme model, the Court has laid the foundation for systemic reform. The judgment highlights the need for accountability, transparency, and structural restructuring of financial and real-estate institutions.
The unraveling of the subvention scheme scam is not merely a case of delayed housing projects; it is a reflection of deeper institutional vulnerabilities. The Supreme Court’s directions ensure that homebuyers will no longer bear the burden of frauds committed by more powerful entities. This case will likely shape the future of real-estate financing in India and may establish a stronger legal regime that prioritises consumer protection and financial ethics.
Contributed By – Krishnkant Sharma ( Intern )