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Relief for Homebuyers

At long last, the government has given some relief to homebuyers, who are so vulnerable in the hands of rogue builders. As urbanisation gathers pace across the country, there are all-roo-frequent cases of real estate companies declaring bankruptcy and leaving homebuyers in the lurch. Given the steep real estate prices, the decision to invest in an apartment usually requires both husband and wife to be earning, negotiate huge bank loans together and keep paying the instalments, sometimes right up to the end of service life. In case of uncertainties like layoffs on the job front, it becomes very dicey indeed to keep up with the payments. Under the Insolvency and Bankruptcy Code (IBC), 2016 in its present form, homebuyers have no right to initiate a resolution process if a real estate company goes bankrupt — this is because they are not considered to be ‘secured creditors’ (thereby their payments to the builder are graded at lower level than that of the banks). The government has now sought to address this weakness by bringing out an ordinance to amend IBC, 2016, which will place homebuyers on par with financial creditors, primarily the banks and lending institutions that provide loans, against bankrupt real estate companies and start the legal process to get get their hard-earned money back. If the builder or real estate developer becomes debt-ridden, his firm goes into liquidation and he is unable to deliver the homes, the homebuyer will henceforth get the same right over the bankrupt builder’s assets as a bank does. While the committee of creditors work out a plan how to get their shares, representatives of homebuyers too will have their say and thereby ensure that their rights are also protected. Without this provision, banks have focused only in recouping their losses and let the homebuyers go hang; now they will have to share the recovery proceeds with the buyers.

The Indian economy is back on the fast growth track, clocking above 7.1 percent currently. But bad debts have also been rising fast, and a clear indication of the problem is reflected in the State Bank’s balance sheet that was released recently. The huge fourth quarterly loss of Rs 7,718 crore (the second highest so far) wiped out the profits of previous quarters to leave SBI with a loss of Rs 6,547 crore for the full year. According to bank experts, it was high time the country’s largest public sector bank put out its non-performing assets (NPA) burden in black and white, as per the Reserve Bank’s directive. It is expected that once banks conscientiously report in their balance sheets all the toxic assets they own, it will open the way for prudent risk management practices in the banking sector. Now regarding the real estate sector, what must not be forgotten is that home buyers too represent banks that have extended them housing finance. The amendment to protect homebuyers by treating damages for breach of contract as financial debt is therefore a step in the right direction. It was one of the key recommendations for making recoveries easier for lenders and expediting the decision-making process by creditors — that was put forward by the committee which reviewed the insolvency and bankruptcy law under the chairmanship of Corporate Affairs Secretary Injeti Srinivas. It also brings the IBC in line with the Real Estate (Regulation and Development) Act that has created rights in favour of homebuyers by holding the developer responsible in case of delay in the construction project and expects the buyer to be compensated. Ever since the introduction of RERA and IBC Acts, winds of change have been blowing in the home construction sector. Many builders/real estate developers found they could no longer get away with their delaying tactics and therefore declared bankruptcy. The Allahabad bench of the National Company Law Tribunal has declared Jaypee Infratech an insolvent company, while groups like Amrapali, Gardenia, Earth and Era too have declared bankruptcy. This has left lakhs of homebuyers high and dry, many of them still seeing EMIs cut automatically from their salaries while their dreams of ever owning a home turn into nightmares. The Supreme Court recently had to order the parent group of Jaypee Infratech to deposit Rs 1,000 crore by 15 June next for ensuring refund of money to hassled homebuyers and submit an interim resolution plan to safeguard the interest of homebuyers. One prays that this well-meaning ordinance will become an Act in due course once Parliament reconvenes, because that will go far in cleaning up the real estate sector. With RERA and an amended IBC, prospective homebuyers will have greater heart in investing in real estate, because they will be more confident of recovering their hard-earned money if things don’t work out with the builder.

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Ankur Kalita