Jaypee may be the most high-profile case where the hunt for a resolution applicant continues but there are several other real estate projects across the country where homebuyers continue to face uncertainty.
Five years after the Insolvency & Bankruptcy Code (IBC) was notified, only eight resolution plans for real estate sector have been approved although some 205 cases had been admitted until March 2021, Insolvency & Bankruptcy Board of India data showed.
That translates into a success rate of under 4%, making it the worst-performing sector, barring computer and related activity (see chart).
This is despite the stakes being much higher. Unlike other sectors, where it is banks and operational creditors such as suppliers who drag companies to the National Company Law Tribunal (NCLT), in realty there is the additional challenge of protecting the interests of homebuyers, who invest their life-time savings.
No wonder, this is the only area where even the government made an exception in bumping up homebuyers from the category of operational creditors to financial creditors — giving them an equal say in deciding the new resolution applicant.
“Unlike in other sectors, there are more complexities in real estate. It’s not just IBC, which usually has institutional creditors and suppliers. RERA, which means protecting buyers who may have a bank loan, is another case in point. Moreover, the rules keep evolving, which makes it difficult to comply with newer guidelines when a developer looks to take over a project. Basically, these regulations and guidelines are still work in progress and need to evolve further. That said, they are still major upgrades over the previous lack of regulation and redressal mechanisms,” said Shobhit Agarwal, MD & CEO at Anarock Capital.
For banks, the primary focus of the resolution exercise is to minimise the hit that they have to take on their loans and maximise the gains. In contrast, homebuyers want a more stable company to take over the company even if it means that lenders have to take a haircut.
What has complicated matters is a fall in real estate prices, making the project unviable for resolution applicants. “Projects normally won’t be commercially viable if the cost of construction is more than receivables and financial creditors consist of financial institutions and homebuyers. In many cases, funds have been diverted and the corporate debtor (company) doesn’t have sufficient money to construct the units. In such cases, projects are in a limbo. Besides, the market doesn’t have adequate liquidity to support real estate cases,” says Chandra Prakash, a resolution professional dealing with three real estate projects.
There are other complications when land is owned by more than one entity and it needs to be combined. “In such cases, project insolvency laws should be applicable whereas in IBC we don’t have project or group insolvency (provisions),” Prakash added.
The problems with resolution have resulted in suggestions for a review of provisions. Former Oriental Bank of Commerce CMD Mukesh Kumar Jain suggests a hybrid model for real estate.