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To protect homebuyers from bankrupt builders, here is what Narendra Modi government is looking to do

The Financial Express logo The Financial Express 20-10-2017
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The ministry of housing and urban affairs has sought a review of the Insolvency and Bankruptcy Code (IBC) in order to ensure that homebuyers are not given short shrift when real estate firms enter the bankruptcy zone. In a letter to the secretary, corporate affairs, Tapan Ray, his counterpart in the housing and urban affairs ministry Durga Shankar Mishra suggested that homebuyers be made "primary secured creditors" so that their right to claim over distribution of assets should be above all other "secured creditors". Mishra also suggested that the IBC ought to ensure that all real estate projects facing insolvency register themselves under Real Estate Regulatory Authority (RERA) and deposit 70% of the amount for construction in a separate escrow account. Also, at the initiation of the insolvency proceedings, the regulatory authority should be informed. Mishra wrote: "The ideal way to protect the interest of home buyers is to recognise them as 'financial creditors' which would automatically make them part of the "creditors committee". Also, as per the provisions of the Code, as not all "financial creditors" are "secured creditors", the investments of home buyers should be recognized as a "security interest" under the Code to make them "secured creditors". Consequently, though the real estate project would be part of the resolution plan, the distribution of assets, in the event of liquidation, would be protected under section 52 of the Code."

Lakhs of homebuyers have been affected by the bankruptcy proceedings initiated against builders such as Jaypee Infratech and Amrapali. The panic over the situation comes from the fact that under the IBC, once the resolution and liquidation process of a firm is completed, a portion of the proceeds goes towards recovering liquidation costs, followed by payments to workers, employees and the banks and financial institutions involved in the projects, and settling government dues, in that order. It is only then homebuyers are taken into consideration. "It is also essential to provide appropriate directions to the IRP (interim resolution professional) to ensure, either through regulations or modification in the code, that in case of real estate projects, completion of the projects should be the goal of the Resolution Plan, including protecting the interest of home buyers," the housing and urban affairs secretary opined. "The suggestions made by the ministry of housing and urban affairs ministry needs to be immediately incorporated in the IBC through an ordinance with retrospective effect... Further, in case of liquidation, homebuyers' claim with regard to their principal amount along with interest should be given top priority," Abhay Upadhyay, national convenor, Fight for RERA, said. "It is pertinent to note that Uttar Pradesh Real Estate Rules in the jurisdiction of which JP Infratech case belongs does not have the provision to deposit 70% of the money already collected from the homebuyers of ongoing projects in a separate bank account as the rules were diluted by then Uttar Pradesh government to favour developers... This will certainly give strength to the resolution plan towards ensuring completion of projects," Upadhyay added.

Surbhi Prasad

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