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January 2, 2020RERA and IBC: The real solutions for real estate
Recent announcements by the FM involving financial stimulus for the revival of the real estate sector are nothing but a reaffirmation of the importance of the sector. Estimates by the NITI Aayog show that the sector has a size of more than Rs 8 trillion and accounts for 7% of GDP. It is also estimated that real estate will reach a size of Rs 45 trillion by 2040, by when its share in GDP will rise to 14%. By then, the jobs generated in the sector will increase from 55 million to 66 million. Yet the sector has been subject to various challenges of late, raising doubts about growth projections.
From demonetisation to GST, developers have taken a hit. The NBFC fiasco and the ensuing credit shortage led to the collapse of liquidity in the market.
Economic slowdown resulted in unsold properties in metros. In the midst of these challenges a fundamental shift in the role and outlook of homebuyers transpired. Earlier, homebuyers used to approach consumer courts to redress their grievances. Then came the Real Estate (Regulation and Development) Act, 2016, or RERA, which can become a meaningful platform to address the grievances of homebuyers in a systematic way.
The government did not stop there; it brought an amendment to the Insolvency and Bankruptcy Code, 2016, in August 2018 to allow an individual homebuyer to initiate the Corporate Insolvency Resolution Process against the National Company Law Tribunal (NCLT). The amendment has given homebuyers the status of ‘financial creditors’. This provision was upheld by the Supreme Court in August 2019. Though the sentiments of homebuyers are to be taken into consideration, it has resulted in doing more harm than good.
As per government estimates, 1,821 cases filed by homebuyers against builders since June 2018 were pending in the NCLT as on September 30, 2019. Instead of finding feasible meaningful solutions, the issues are being aggravated. The piling of cases in the NCLT goes against the very objectives for which the IBC has been formulated, and it would help neither genuine homebuyers nor sincere developers.
The provisions allow any allottee to trigger insolvency. This allottee could be a genuine homebuyer or a speculative market maverick. The amendment has given homebuyers a seat in the committee of creditors so they can either remove the management or vet a resolution plan. When a party with vested interest appears as a genuine homebuyer and leverages on IBC provisions, it will affect other customers who should have been delivered their apartments. The treatment of homebuyers on a par with banks forces banks to limit the supply of credit to the sector. By including homebuyers in the explanation of Section 5(8)(f) of the IBC, other remedies such as RERA or civil and criminal laws are sidelined.
While the acknowledgement by the government for the need to amend the IBC is a welcome step, it needs to be pursued in a time-bound manner. In this regard, the latest decision by the Union Cabinet to approve a proposal to promulgate an ordinance to amend the IBC 2016 should help ensure smooth implementation of the IBC.
Also, a pragmatic suggestion is to build the capacity of RERA as the first point of grievance redressal. If the parties fail to reach an amenable resolution at RERA and all other provisions get exhausted, majority homebuyers could approach the NCLT for resolution mechanism. Else, there is no doubt that the IBC in the current form will play havoc to the promising NCLT. Instead of strengthening the NCLT, the amendment implemented in June 2018 in the IBC has weakened the institution by fostering more cases getting posted there. It does not help bankruptcy procedures nor the issues in the housing market.
It’s time the government expedites the process of revisiting the amendments that have given homebuyers such an option, which, in the current form, has the tendency to further burden the NCLT with insolvency cases invoked by lone/speculative homebuyer even against genuine real estate developers. This situation, if left unaddressed, is likely to translate into more woes for genuine homebuyers who were the intended beneficiaries of this amendment in the IBC. The growth of the real estate sector is important if the economy has to fire again. That growth will only happen if constraints dogging the sector are identified and removed.
This article was published in the Financial Express on January 1, 2020 click here to read
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.
Dr Dhanuraj is the Chairman of CPPR. His core areas of expertise are in international relations, urbanisation, urban transport & infrastructure, education, health, livelihood, law, and election analysis. He can be contacted by email at [email protected] or on Twitter @dhanuraj.
