by Dhirendra Kumar
The recognition of home buyers as financial creditors under the bankruptcy law may well turn out to be the most important legal development ever in India’s real estate industry. It is likely that it will have a deeper, more positive and immediate impact than the Real Estate Regulation Law, passed last year. The reason for this is that the ‘Insolvency and Bankruptcy Code Amendment Ordinance, 2018’ can solve what is the biggest problem that existing home buyers are facing today and unlike RERA law, can do so on a retrospective basis for existing victims of developers.
Effectively, the law now incorporates the on-ground reality, which is that home-buyers are not just customers but also a source of capital for developers. A large part of the finance needed for private builders’ housing projects comes from home buyers and therefore, unlike customers of other types of products and services, they are financial creditors.
Those who are criticising the changes on the grounds that customers are being treated as lenders are choosing to ignore this. This is a historic change in the legal structure of buying a home. It will not only affect most of the existing problematic projects but also how all housing projects are planned and funded in future. The impact on currentlydistressed homebuyers is obvious. Once the Bankruptcy Board formulates the procedure by which home buyers can organise themselves, one expects many housing projects being taken to the bankruptcy process. It’s possible that the mere prospect of this happening will trigger a resolution in many such cases.
It’s also likely that in some cases, the developer is genuinely bankrupt and there is no prospect of recovery. In those cases, the insolvency process will start and then homebuyers will have to argue their case along with other creditors. It’s notable that the amended law does not take a view as to whether homebuyers are secured creditors or unsecured ones. This will have to be argued based on the nature of agreement.
Going forward, the new dispensation will impact future housing projects. By taking an advance from a customer, a financial creditor is being created will no doubt be a factor. Similarly, institutional lenders will have to recognise that a developer who is succeeding in selling apartments in advance to homeowners is, in fact, taking on what will be competing debtors in case the project becomes insolvent. There is bound to be pressure from institutional lenders to structure sale agreements in such a way that homebuyers’ claims will be junior to theirs in case a project fails.
The amended law is a huge step forward for homebuyers’ welfare. To a large extent, a part of what we expected RERA to deliver has been done by this law. While RERA is dependent on state governments and is getting implemented at a varying pace, the bankruptcy law is now in effect across the country uniformly.
Its impact will be felt soon, and likely in a large way.
(The writer is CEO, Value Research, views expressed are of his own)