Pause in IBC, internal issues halt takeover of stressed projects

Big developers are in wait-and-watch as leveraged developers have made use of the six-month loan moratorium, effectively avoiding defaults

Cash-rich developers are in a quandary about taking over stressed property projects.

The reason: Opportunities to take over under the Insolvency and Bankruptcy Code (IBC) process have dried up this year after IBC procedures were first suspended for six months, and then by another three months till December 31.

Big developers are waiting for better deals to buy out stressed projects as leveraged developers made use of the six-month moratorium on loan payments, and effectively avoided loan defaults. Many are also conserving cash to tide over the difficult times in which sales have dwindled and cash flows have been severely hit.

“I know a couple of developers who want to sell. But they are not in a hurry. They know banks will not go to IBC,” said Niranjan Hiranandani, managing director of Hiranandani Communities, a prominent developer in Mumbai.

Hiranandani however said that there are many deals in the market for takeover. “We are waiting to sign proper deals with valuations acceptable to us,” he said.

The chairman of another property development company, who did not wish to be identified,  said that the pause in the IBC process has brought the sale of projects to a grinding halt. 

“Many deals in the market are not going ahead due to IBC. We have to see how things unfold next year,” he said.

As many as 220 projects, with 174,000 homes, are “completely stalled” in the top seven cities alone—Delhi National Capital Region, Mumbai Metropolitan Area, Bengaluru, Pune, Hyderabad, Chennai and Kolkata, according to Anarock Property Consultants. The value of these projects is estimated at more than Rs 1.77 trillion, Anarock said, adding that these were launched either in 2013 or earlier, and the construction work stopped due to liquidity issues or litigation.

Finance Minister Nirmala Sitharaman said last week that the extension of the suspension of sections 7, 9 and 10 of the IBC reinforces the government’s commitment to protecting businesses. “It also gives companies breathing time to recover from financial stress,” she said in a tweet. The government had issued an ordinance to amend the IBC in June to enable the suspension of the Code’s provisions for firms committing defaults after March 25.

“In IBC, it is the prerogative of financial institutions, not developers. Financial institutions want clarity from the Supreme Court, government and so on, We are talking to a lot of people but deals have not closed yet,” said Boman Irani, chairman and managing director of Rustomjee, a developer based in Mumbai which has taken over some of the projects in the last couple of years.

Irani said there is a wide gap in the expectations of buyers and sellers. “We will not take the projects just for the sake of it. We will buy only doable projects,” he said.

The non IBC, stressed projects have also not seen any major traction in the last six odd months as property developers focused on saving cash during the difficult times and repay their obligations.

Developers such as Prestige see a lot of mismatch in price expectations between buyers and sellers.

“Land prices should get rationalised. Because banks lent a lot of money to developers in lieu of land and the value of land hasn’t dropped so it’s very difficult to get the numbers matching to make it a reasonable offer,” said Juggy Marwaha, chief executive  of Prestige Office Ventures.

In Bengaluru however people are still more forthcoming as compared to Delhi and Mumbai and settling for what they can, he added. 

Vijay Wadhwa, chairman of Mumbai based Wadhwa group said the wrong projects  have been coming to performing developers. "On the contrary lot of money has to be put from somebody’s pocket to complete those projects. How NBFCs have funded God alone knows. The time has started when NBFCs have started taking haircuts in a big way. The earlier they take the better it is," Wadhwa said.

Shobhit Agarwal, managing director of Anarock Capital, said though a lot of stress got created  in the past few months, the take over of projects will not happen in a hurry.

"Cash-rich developers are in a strong position. But till the time the visibility does not improve in terms of improved situation, we may not see a significant rise in developers taking over stressed projects in a big way. But that does not mean that they will shy away from evaluating the right opportunities," Agarwal said.