IBC, RERA need a relook to offer real protection to homebuyers

November 15, 2019 1:23 PM

While well-intentioned, IBC and RERA have not really lived up to their billing on many fronts: protection of homebuyers and sustaining a thriving sector.

real estate, real estate in India, Indian Bankruptcy Code, IBC, Real Estate Regulatory Act, RERA, IBC RERA need a relook, protection to homebuyersOne can still have recourse to the NCLT as part of the IBC process but it’s important to ensure that such a recommendation comes from RERA as the real estate regulator.

It is said that the road to hell is paved with good intentions. The real estate sector, a key engine of economic growth, is a case in point. While well-intentioned, the Indian Bankruptcy Code (IBC) and the Real Estate Regulatory Act (RERA) have not really lived up to their billing on many fronts: protection of homebuyers and sustaining a thriving sector which is a net job generator and an engine of economic growth.

Let us analyze a small sample set of such steps leading up to the current state of affairs in the sector with a spiraling effect on the economy.

The Indian Bankruptcy Code (IBC) – Well-intentioned but may need a relook

The legislation is a welcome step, but works best for an ongoing industry and not a project-based business and hence will not be able to bail out industries like real estate, EPC and other such businesses since the premise is always that if past issues are addressed, the business in itself is viable as a going concern. Unfortunately, real estate is a project business and does not function on a going concern basis. Add to it, the inertia in the banking sector to take adequate haircuts and the decision paralysis does not help the cause at all.

And, finally it is not a tool to inject liquidity, the negotiations are based on banker bailout and not project completion. In all, a well-meaning exercise in futility.

Real Estate Regulatory Act (RERA)- Should be better leveraged for settling project level issues

Next, let’s focus our attention on the well-meaning RERA. A great forward-looking regulation that is best suited to primarily address issues related to real estate projects.

RERA was envisioned to be an all-encompassing regulator for the real estate sector, one which would be a one stop shop to address all issues concerning this sector, including that of homebuyers. And RERA has enough teeth to ensure that its interventions carry enough force to be able to solve many of the myriad problems of the sector. However, the reality has been slightly different ever since the IBC mechanism has come into play. That coupled with the court directive of treating homebuyers as ‘financial creditors’ has resulted in a rush of homebuyers knocking on the doors of the NCLT, thus making it a very clogged arm of the judiciary.

Nevertheless, it’s important to leverage the RERA architecture to ensure that homebuyers use this platform as their first port of call to sort out project level grievances so that deliveries still remain on track and are not thrown into the legal maze of the NCLT/IBC process. One can still have recourse to the NCLT as part of the IBC process but it’s important to ensure that such a recommendation comes from RERA as the real estate regulator.

Is the IBC in its current form actually protecting home buyers?

In the last three years, 21,000 cases have come before IBC, of which only 10,000 cases have been settled, many of them from the sector. In other words, what started off as a well-meaning safety net for homebuyers has come back to haunt them because if insolvency is triggered by a lone/speculative homebuyer, it would affect other customers who have got deliveries or are about to get them, thus throwing the entire project into jeopardy.

That is why the government would do well to ensure that RERA remains the single most important port of call for aggrieved homebuyers and if at all, the NCLT needs to be approached, a majority of homebuyers should take that call.

The recent liquidity injection by the Government of India- Wrong end of the stick?

The government’s recent intervention regarding the liquidity injection of around 20 thousand crore rupees is the single most relevant step in the right direction, but unfortunately, the conditions imposed exclude the real estate companies already facing insolvency proceedings at the NCLT which account for 80 percent of the pain in the system. If it has to apply to projects that are not yet referred to IBC or have not defaulted, then they have some vapes of liquidity left anyway!

So, again pretty well-intentioned but perhaps not addressing the already affected parts of the problem.

What’s the way ahead?

Treat the liquidity malaise

By all accounts, the crisis was triggered owing to a vicious liquidity cycle coupled with cashflow mismanagement and an illusion of liquidity. The illusion was characterized by upfronting of cash flows leading to a liquidity buffer where the outflows get pushed to the end of the project lifecycle.

In other words, this is in essence a cash flow and not a solvency problem and the government seems to have woken up to the issue. The recent liquidity injection was therefore a step in the right direction. However, the current vicious cycle has only propelled banks, lenders and other creditors to continue to withhold financing, an attitude borne out of a lack of faith in the developer.

The results are there for all to see. There are $63 billion of stalled residential projects across the country today, according to Anarock Property Consultants. As lenders stop new credit, builders are forced to offload properties. Prices fall, causing real estate loans to turn sour, pushing more shadow banks toward default and the downward spiral continues.

And jobs are lost manifold in this sector, not to speak of the economy which has already lost a lot of steam.

Financing out of this mess is, therefore, a priority.

Look at regulatory flexibility

However, the scenario outlined above should not be the case given that typically in the real estate sector the asset values remain at multiple times of the outstanding dues and it is only the liquidity which is temporarily affected. However, stringent regulatory guidelines on stressed assets which make reporting even for a single day’s default mandatory and appropriate classification by the RBI on the same, have further queered the pitch when all that is required is some extension of time to match the slower sales cycle and some funding for completion of the project within mutually agreed timelines.

The government could think about bringing in caveats to flippant use of the ‘financial creditor’ status for homebuyers as also a threshold that could trigger proceedings at the IBC. This will hopefully keep otherwise healthy projects on track with project deliveries proceeding on time. In other words, a win-win all around.

(By Jasmeet Chhabra, Managing Partner, Cerestra Advisors Ltd)

(Views expressed are personal)

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