There is good news for home buyers who had the misfortune of buying flats from real estate firms who went kaput. With President Ram Nath Kovind approving the Insolvency and Bankruptcy Code Ordinance, 2018, home buyers are now on a par with other financial creditors of a bankrupt realty firm. With thousands of such home buyers till now facing uncertainty about the fate of their invested money in homes, they are hapless no more.
The amendment clearly allows home buyers to be treated as secured “financial creditors” for the insolvency process. This means the home buyers' total investments are reflected in the sum which can be recovered from the sale of assets of the bankrupt firm or company.
The process is pretty easy. Home buyers can now invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, against such errant developers. This is exactly what banks do.
Also, such home buyers will be represented in the Committee of Creditors. This is an important step because it allows for a representative. Earlier, home buyers were treated as an unsecured creditor. This was of not much use because that graded their investment as an unsecured loan. By definition, an unsecured loan ranks quite low on the credit hierarchy and is given importance only after the bankers and other secured lenders have recovered their money.
With the window now open for being a secured financial creditor, nobody can touch the property of the home buyers. Earlier, once a realty firm went bankrupt, the flats for which home buyers had given money would become the property of banks. This sometimes resulted in these homes being open to auction them, even though they were actually investments borne out of the hard-earned money by common people.
The amended IBC does not clearly specify if homebuyers are to be treated as secured or unsecured financial creditors. Some believe the homebuyer will have to prove which category of creditor he/she is qualified to be after looking at the agreement with the real estate company. It is expected that over the next 2-4 weeks, the Insolvency and Bankruptcy Board of India will frame the detailed mechanism of representation of the homebuyers on the committee of creditors, and also give clarity on the secured/unsecured status of homebuyers.
Now, disgruntled home buyers have a status in case their real estate development company goes bankrupt. It is estimated that there are a huge number of home buyers facing difficulties due to delayed and incomplete real estate projects. A large portion of them is also quite complicated case types, as a number of realty firms have come under insolvency proceedings.
Do remember that the home buyer used to be the worst sufferer. As banks only give 80 per cent of home purchase price as a loan, the home buyers in most cases invest all or a significant part of savings with the developer. Then, they are also paying EMIs on the loans taken. Plus, with homes usually getting delivered 36-48 months later, the home buyer also pays rent of the currently occupied property.
With the new law, the home buyer gets a voting right. The home buyer can influence the resolution process in a way that their interests are safeguarded in the same way as banks.
On May 23, the Union cabinet had taken the ordinance route to give home buyers benefits similar to banks and institutional creditors if the realty firm undergoes bankruptcy proceedings.
Some analysts had earlier pointed out that by not treating home buyers as financial creditors, the IBC and RERA Act were taking opposite positions in case a real-estate firm goes kaput.
In the present scenario within the real estate sector, it is developers, rather than home buyers, who default on payments. Competition among developers led to massive accumulation of land. More money was required to build up land banks. Borrowing money for this purpose happened. Land development meant that the interest burden accumulated by developers was extremely huge. In many cases, the interest burden was much more than what could be met by the development and marketing of home properties and commercial floor space. So, real estate developers had to stop servicing debt and have now become part of the country’s Rs 10-lakh crore bad loan problem.
The author is a financial journalist with 13 years of experience