Why financial creditor status for homebuyers won’t help

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Published: March 23, 2018 5:00:14 AM

Homebuyers need to get their projects completed whereas financial creditor status really comes into play after liquidation

homebuyers, financial creditor status, Union government, Kotak, cube highways, Taj Expressway In the case of the Kotak-Cube bid for Jaypee Infratech, for instance, the team was willing to complete construction of the project across some 52 million square ft at an estimated cost of Rs 6,500 crore.

Given the lakhs of people who have invested their life’s savings to buy a house, it is not surprising that the Union government should be thinking, as FE has reported on Wednesday, that homebuyers are to be given a ‘financial creditor’ status. Till now, once a firm was liquidated, the costs of the liquidation process and the workers’ dues were first paid out of the money received, then the financial creditors got paid and, along with many others, homebuyers were much lower down the pecking order when it came to getting back their dues. If the change in the Insolvency and Bankruptcy Code (IBC) goes through, homebuyers will be on a par with banks when it comes to getting back their dues.

The move, though seemingly fair to homebuyers, is fraught with danger and the government would do well to not go down that path. For one, once homebuyers are given the status of financial creditors, others will also want this and will probably approach the courts for this—this could include suppliers whose dues have not been paid or even buyers who have paid for goods like TVs and mobile phones but have not got them. In such a situation, the IBC resolution process gets even more complicated since a lot more people will have to agree to any solution. Indeed, since any resolution requires financial creditors to take huge write-offs on their original loans, even homebuyers may be called upon to write off 50-60% of their original deposits.

More important, as this newspaper has argued before, it is not in the interests of homebuyers to see the builders/companies getting liquidated since, once this is done, you get perhaps just 10-15%, if that, of the original value. Instead, the government should help sell the company to a group that can complete the buildings and give possession to the homebuyers, if need be, after charging some more money—on the assumption the original builder has siphoned off the funds. In other cases, perhaps, the government can look at giving the new buyer an asset—assuming the errant builder has no parcels of land or other assets that can be seized—so that the homebuyers don’t have to pay more for their homes that have already been delayed for, in many cases, decades.

In the case of the Kotak-Cube bid for Jaypee Infratech, for instance, the team was willing to complete construction of the project across some 52 million square ft at an estimated cost of Rs 6,500 crore. But, in return, Cube Highways wanted to be able to operate the Taj Expressway that is run by the Jaypee group—the state government would need to give necessary approvals for this—while Kotak Realty wanted to get some fresh land parcels to build apartments for sale.

Such a solution is infinitely more complicated, and it cannot be executed by insolvency resolution professionals (IRPs) alone; it requires close cooperation with the state and, if need be, the central government. Changing the status of homebuyers, by contrast, just requires legislation and will also be popular as it will be seen as a sign of a government that cares for homebuyers. But if the government is interested in more than just the optics, it needs to work to transfer the company to a consortium that can actually give homebuyers their homes and the banks some part of their money.

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