IBBI seeks to fix India’s real estate insolvency woes

real estate, insolvency and bankruptcy
While the new real estate insolvency norms offer hope, there is a need to find solutions for troubled unfinished projects.

The Insolvency and Bankruptcy Board of India has announced a major relief for homebuyers in its latest update of insolvency regulations for the real estate sector. The latest changes announced by IBBI excludes properties already handed over to the buyers from the company’s liquidation estate. This means that even if the builder of a project declares bankruptcy, properties that have already been transferred for possession will remain secure. This change, announced in a notification dated February 12, is seen as a pragmatic move by the regulator, acknowledging the longstanding challenges homebuyers face with delayed projects and insolvency issues.

This relief is among the 12 key amendments aimed at streamlining the liquidation process contained in the recent notification. These amendments enhance transparency and empower the consultative committees by mandating that the liquidator consult the committee on various aspects of the liquidation process. Additionally, registered valuers are now required to present their valuation methodology to the consultation committee before finalising the valuation report.

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While this amendment is commendable, the regulator should also address situations where possession has not been granted because the property is mired in insolvency. A discussion paper released on November 7, 2023 by the insolvency regulator had previously discussed this issue.

The regulator has suggested selling of different segments of a distressed project to various buyers, rather than offloading the entire asset in one transaction. This approach could generate more interest and potentially rescue more projects. Another proposal is to enhance the powers of the Real Estate Regulatory Authority (RERA), requiring all real estate projects undergoing bankruptcy to register with RERA, a government entity designed to protect homebuyers’ interests.

Several stakeholders have expressed support for the amendments, highlighting the significant relief they would provide by granting homebuyers a voice in the Committee of Creditors (CoC). Currently, homebuyers have limited influence over bankruptcy decisions. The proposed changes seek to prevent unnecessary legal disputes during the process.

The committee led by Amitabh Kant, former CEO of NITI Aayog, had recommended that the Insolvency and Bankruptcy Code (IBC) address the complexities of the real estate sector. It suggested that ownership and possession of homes should be transferred directly to homebuyers in the event of developer facing financial difficulties, even before the developer’s issues are fully resolved.

The IBBI’s latest notification marks a positive development in corporate insolvency resolution, introducing amendments to empower stakeholders and enhance the efficiency of the liquidation process. These changes mandate stricter timelines, including the requirement to submit a liquidation proposal within 30 days of commencement, and prescribe a standardised format for reporting consultations, ensuring transparency and accurate documentation.

Legal opinion views these amendments positively, noting their potential to improve creditor control, transparency, and process efficiency. While the long-term impact on current proceedings is yet to be seen, these changes undeniably represent a step towards a more effective and stakeholder-focused liquidation process.

India’s real estate sector is experiencing a revival, driven by increased investment in physical assets, a demand for larger homes, and the need for more office space post-pandemic. However, the sector’s robust growth faces obstacles. Given the real estate sector’s significant impact on industries like steel, cement, and transportation, it is crucial for policymakers and the government to address these challenges. Special attention is needed to understand the factors behind the diminishing demand among lower-income groups.

Residential real estate sales rose by 12% in the September 2023 quarter compared with the same period last year, achieving 135% of the quarterly sales in 2019. The sector, which had been in a prolonged slump, is now emerging stronger, with sales reaching a six-year high in 2023. Developers are responding to the surge in demand with new project launches. According to Knight Frank, this uptick in demand is also reducing the stock of older inventory. Moving forward, it is imperative for the government to sustain this momentum and address the sector’s challenges effectively.

While the amendments come as a significant relief to home buyers, the issue of incomplete projects where possession hasnot been granted remains. Implementing the proposals discussed in the November paper, such as segmented sales and enhanced RERA powers, could offer crucial solutions. This would empower homebuyers further and potentially revive more distressed projects, ultimately contributing to a healthier real estate ecosystem.

India’s real estate revival necessitates not just tackling insolvency issues but also addressing broader challenges. Understanding the reasons behind declining demand among lower-income groups and devising targeted solutions are crucial for inclusive growth. Moreover, streamlining regulations, boosting infrastructure development, and ensuring transparent land acquisition processes can further unlock the sector’s potential. By addressing these concerns alongside the positive insolvency reforms, policymakers can create a robust and sustainable real estate environment, contributing significantly to India’s overall economic growth.