The dream of owning a home has been on the priority list of every middle-class person. The last decade hasn’t been a good one for these aspirants, insolvency cases resulting out of bankruptcy filed by real estate developers being a major part of the reason.
Homebuyers’ investments into projects in development have been better protected ever since the Real Estate (Regulation and Development) Act (Rera), 2016, came into force. But the regulation does not define the recourse if the developer files for bankruptcy.
Industry estimates put the number of residential units, either unsold or not yet handed over to buyers, in India’s eight metros at approximately one million.
The Supreme Court, in an amendment to the Insolvency and Bankruptcy Code (IBC), has ruled that homebuyers are to be treated at par with financial credit institutions or banks.
The amendment recognises homebuyers as financial creditors to real estate developers, which essentially puts them in the same category as institutional lenders and service providers during insolvency proceedings.
It also ensures that homeowners are duly represented in the committee of creditors (CoC) responsible for making key decisions on resolution proposals.
The voting threshold in all major decisions under IBC has been reduced to 66%, from the earlier 75%, to encourage resolution over liquidation. For routine decisions, it has also been slashed to 51% to aid corporate debtors.
The amendment guarantees homebuyers, perhaps for the first time, the power to hold home developers accountable, and offers special dispensation to small sector enterprises. It protects the credit profile of the homebuyers from getting affected by developers’ malpractices. It gives them greater say, and holds developers accountable.
After the ruling, IBC now makes a resolution application available, only if 90% of the CoC approves the motion. This is done in case the developer can manage to raise funds required to keep the operations moving, and pay off debtors. This works well for all parties involved, more importantlyto homebuyers who would prefer to gain possession of their properties.
Despite these positive changes, thereare certain critical aspects that the amended IBC leaves unspecified for now. For instance, it does not specify whether home-seekers are to be treatedas secured or unsecured creditors.
It also puts the burden of proof on the home-seeker to substantiate the creditor category they are qualified for, and basis their agreement with the real estate company undergoing insolvency. This ambiguity leaves IBC open to manipulation.
In spite of the grey areas, the recent amendment to IBC is welcome. Following close on the heels of the Rera implementation, it marks GoI’s commitment to protect the interests of homebuyers. It will significantly curtail the prevalent malpractices in the Indian real estate sector by making developers more accountable for their undertakings, thus raising the end-consumer trust and confidence.
Increased buyer confidence will stimulate greater purchasing activity of residential properties. This, in turn, could help in reversing the downturn that the country’s real estate industry has been facing.
Source: July 6, 2018, Economic Times