1. On builders broken promises, why homebuyers must share the pain with banks

On builders broken promises, why homebuyers must share the pain with banks

Builders were a virtually unregulated lot before the Real Estate (Regulation and Development) Act came into force in 2016 and Real Estate Regulatory Authority (RERA) was set up subsequently. Unfortunately, thousands of homebuyers have been duped by builders, and it is understandable that the courts want to make sure they get their homes.

By: | Published: October 18, 2017 5:17 AM
The several instances of builders going bankrupt, leaving home-buyers stranded without homes or compensation, have prompted the courts to intervene to address the latter’s grievances.

The several instances of builders going bankrupt, leaving home-buyers stranded without homes or compensation, have prompted the courts to intervene to address the latter’s grievances. In the Jaypee Infratech case, for instance, the Supreme Court has asked the Resolution Professional (RP) to ensure home-buyers’ interests are taken care of. As a result, they now have a representative on the creditors’ committee. To be sure, the grievances of homebuyers need to be addressed, given many of them have invested a lifetime’s savings in these homes. Builders were a virtually unregulated lot before the Real Estate (Regulation and Development) Act came into force in 2016 and Real Estate Regulatory Authority (RERA) was set up subsequently. Unfortunately, thousands of homebuyers have been duped by builders, and it is understandable that the courts want to make sure they get their homes. However, even as they empathise with homebuyers, both the government and the courts need to ensure the regulations are not entirely skewed in their favour, and to the detriment of the banks and other financial creditors. In this context, the recent set of suggestions made by the ministry of housing and urban affairs to the ministry of corporate affairs are somewhat disconcerting. The housing ministry has suggested that the best way to protect the interests of homebuyers, left high and dry, is to recognise them as financial creditors. If that was not worrying enough, the housing ministry wants homebuyers to be not only treated as financial creditors but also as primary secured creditors. It has sought suitable amendments to the IBC (Insolvency and Bankruptcy Code) so that in the event of the assets being liquidated, homebuyers would have the first right—“above, all other secured creditors”.

Homebuyers are not financial creditors in the first place—consequently, giving them that status would be patently unfair to the real financial creditors. Also, amending the IBC to suit one set of stakeholders will set a precedent and it will be difficult thereafter to prevent other creditors—vendors, for instance—from claiming similar rights. Indeed, the courts will find it hard not to give them the right to also be designated as financial creditors. In the process, the rights of banks and other lenders will be diluted, with serious consequences; not only will their balance-sheets be badly hit, they could stop lending altogether. The housing ministry has observed that making homebuyers operational creditors would not serve any purpose as they would not be part of the creditors’ committee under Section 21 of the IBC. It also wants the IBC to be modified to ensure that the completion of a real estate project should be the goal of the “resolution plan”. In addition, it wants that homebuyers, like financial institutions, be paid interest on the principal amount in the event the assets are liquidated. It is surprising that in all these decades, no government felt homebuyers needed to be protected from unscrupulous builders with proper legislation.

While the efforts of the housing ministry are laudable, it is completely ignoring the rights and privileges of banks and financial institutions. In fact, the Supreme Court had done well to allow IDBI Bank to pursue insolvency proceedings against Jaypee Infratech, although homebuyers had asked for a stay. The best way out would be for homebuyers to agree to share the pain by taking haircuts. What is most important is a quick resolution of the problem; for instance, the projects could be sold to other developers who could complete them. Litigating endlessly will help neither the lenders nor the wannabe home-owners.

  1. Amitava Chatterjee
    Oct 23, 2017 at 4:57 pm
    Hay the author of this article!!! Splendid Journalism!!!! It seems you have published a paid news under the guise of THE FREEDOM OF PRESS!!! Had you have gone to THE JAYPEE SALONE for "This Haircut", you would feel the pain of loosing ALL THE HAIRS!!!!!
    Reply
    1. N
      Navi
      Oct 19, 2017 at 6:28 pm
      " Homebuyers are not financial creditors in the first place " is Fundamentally flawed logic - thus consequently the whole analysis !! If it is not so, then Why developers should take money at all under various options given to buyers such as (1) Pay affront - get assured return till possession or price is lower for early bird (2) pay as per construction progress plan and a higher price than option 1 or (3) Ready to move in at higher prices than previous options. Interest or return on investment is inbuilt in these options making selection of option more a financial decision depending upon individuals situation. Look from other angle also. All corporate world is Commercial world. Law requires them to follow commercial principles of accounting etc. Corporate world works for profit and takes risk and its rewards. Decisions are accordingly made. Once in difficulty, all escape routes are valuable. Why Financial Newspapers should not serve public interest rather side with defaulters!!!
      Reply
      1. O
        Oswald Pereira
        Oct 19, 2017 at 12:16 pm
        You are being unfair to home buyers, who have spent their life's savings on buying homes. I met an elderly lady at one of the protest meetings against Jaypees. She said that she and her husband and her two children and their families had all bought properties in Jaypees. Thus an entire family was ruined because of crooked builders. So, isn't it right that the interest of home buyers, who have nothing to fall back on should be protected first? By your skewed reporting and unfair opinion, you seem to have shown your true colours of being a crony of the establishment. You are a disgrace to journalism. Shame on you! By the way, I too have been a journalist for more than 35 years and I can say that this is biased reporting. Have a heart and don't sell your conscience.
        Reply
        1. Rahul Bhattad
          Oct 18, 2017 at 7:29 pm
          Wow. That’s the only reaction I can muster after reading this. I hope author of this piece never has to suffer same fate as countless families who have invested everything they have.
          Reply
          1. Amitava Chatterjee
            Oct 23, 2017 at 5:18 pm
            I've posted a comment, it harts the paper's business, they have immediately removed my post. Brave journalism indeed!!!
            Reply

          Go to Top