Homebuyers to be treated at par with money lenders

The move will help homebuyers in case of liquidation of a realty firm, as they will now be the third in line to get a share from the liquidation proceeds. Financial creditors get their due after meeting the cost of resolution and workers’ dues

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The Modi government has decided to take the ordinance route to amend the Insolvency and Bankruptcy Code (IBC) for saving the homebuyers from the clutches of realty developers and lending them a voice in the insolvency resolution process by treating them at par with financial lenders like banks. It would give some comfort to the clueless buyers against the defaulting bigwigs, like, Jaypee and Amrapali, among others. 

Speaking on the ordinance route, Rajesh Srivastava, Chairman of Rabo Private Equity Fund, said that though the amendments proposed to be codified would be prospective in operation, it will, however, have bearing on the on-going insolvency proceedings.

Amendments have inherent challenges

The amendments propose to install representatives of home-buyers on the committee of creditors which is empowered to finalise the resolution plan based on a bidding process and is also mandated to ensure that the banks alone do not secure only their lending amount with due interest, shredding the pecuniary fortunes of the home-buyers altogether. But, the proposed move is not a panacea as is being mooted. Nor does it come without a challenge. To say the least, even the extent of representation on the committee of creditors is not spelt out as yet. It would be curious to see how mutually conflicting claims where Jaypee Infratech raised around 13,500 crore from home-buyers by way of booking amount and instalments, which is far higher than the 9,800 crore raised from banks to construct the apartments, Taj Expressway and a hospital, are calibrated and apportioned. 

While a banker argues the move will create a situation where the home-buyers will have a greater say, a Supreme Court lawyer Siddharth Batra thinks otherwise. He holds that this may not be the case since the home-buyer is entitled only to get an apartment, along with the penalty for delayed delivery. Generally, a clause for refund is deliberately omitted in the contract, whereas, in case of bank loans, the repayment schedule is mandatorily stipulated. However, the clarity would emerge only after the relevant rules are notified in pursuance of the statutory amendment, said global reality and retail analyst, Dheeraj Dogra. An investment banker fears the insolvency resolution will become more time-consuming once home-buyers come on board.

Clarity still eludes

The government would need to stipulate how the representative home-buyers will be saddled on the committee and what criteria would be followed for the purpose. A committee headed by Corporate Affairs Secretary Injeti Srinivas, which recommended an elevated status for home-buyers, had suggested that a trustee or an agent be appointed to represent certain classes of financial creditors. Alternatively, the National Company Law Tribunal (NCLT) can appoint a resolution professional for each category of financial creditors, such as deposit holders, those with debentures or home-buyers. While the move will also help secure the interest of mortgage players, it is seen to be making life tougher for the banks.

Conclusion

Treating home-buyers as financial creditors at the macro level will have huge ramifications on funding for real estate sector as banks will be sceptical of sharing the table with them who are likely to be more inward-looking and aggressive than viewing the larger perspective. At the micro level, managing the creditors’ committee meetings with flat-buyers will be a herculean task for insolvency professionals, said Prashant Yadav, an NCR-based lawyer. Realtors too echo the similar concern that the system must uphold the supremacy of a bank mortgage over any other claim, else banks may hesitate in lending to the sector, fears Virender Verma of Pareena Infrastructure.

While the move is likely to benefit the home-buyers in the long run, it sounds alarmed bells for lenders too. This has the tendency to adversely impact the creditors’ willingness to lend since the recovery proceedings will now have another equally-placed class of claimants, which was not anticipated at the time of granting loan to the developers. This will increase the realised haircuts for the financers. Home-buyers could hope to recover some portion of their dues in case the builder defaults as against the current scenario where buyers have to depend on the residual value after all financial creditors are serviced. In the meantime, let’s wait for the codification of the amendments and notification of the relevant rules there — under to gauge the real impact. Maybe, it churns out to be the beginning of “achhe din” for the harassed class of homebuyers.

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