Realty revival: IBC, Rera may need tweaking for booster shot to take effect

In September, Finance Minister Nirmala Sitharaman had announced the Special Window fund but projects in the NCLT or those dubbed NPAs had been kept out of its ambit

Last week the government administered a Rs 25,000-crore booster shot to rescue the real estate sector by approving a “Special Window” fund or an alternative investment fund (AIF) to revive around 1,600 stalled housing projects in the affordable and the middle-income categories. The move is expected to put the real estate sector and in turn, major industries linked to it, on the path to recovery. But for the measures to take effect, clarifications or changes in the Insolvency and Bankruptcy Code (IBC) and the Real Estate (Regulation and Development) Act, 2016, (Rera) may be required.
 
In September, Finance Minister Nirmala Sitharaman had announced the Special Window fund but projects in the NCLT (National Company Law Tribunal), or those dubbed NPAs (non-performing assets) had been kept out of its ambit. After consultations with stakeholders, the government decided to increase the scope of investments to include NPAs and NCLT projects that have not received orders for liquidation.
 
The realty sector accounts for the second-biggest chunk in cases under the IBC.
 
 According to the Insolvency and Bankruptcy Board of India (IBBI) data, as on September 30, 2019, of the 1,497 ongoing corporate insolvency resolution process (CIRP), real estate and related businesses accounted for 299; manufacturing topped the list (593). In terms of resolutions, manufacturing was ahead of real estate.
 
Stakeholders are unanimous in their views that widening the scope of investments to include NPA and NCLT projects is a welcome move. But follow-up measures in the form of amendments or clarifications in the insolvency law may be required going forth.
 
Anuj Puri, chairman, ANAROCK Property Consultants, said under the current provisions of the IBC, existing lenders will get the money. It not clear yet who is entitled to avail of the fund in the case of NCLT projects.
 
“Is it the resolution professional who is running the company or the corporate debtor, or the committee of creditors. These specifics have to be worked out,” said Avnish Sharma, partner, Khaitan & Co.
 
Puri is of the opinion that it is the developer who should avail of the fund. “Someone has to take the responsibility for project completion and that should be the developer. It could be the existing developer or a new developer,” he said.
 
Litigation has been one of the biggest hurdles in a time-bound resolution in IBC cases across sectors, with most breaching the prescribed time limit. Puri believed that there should be protection from litigation in NCLT projects that avail of the Special Window fund. Under the current law, home buyers are financial creditors. “Even one can litigate and derail the process after the project gets funding,” Puri added.
 

The IBC was amended in August 2018, whereby any amount raised from an allottee under a real estate project was deemed to be an amount having a commercial effect of a borrowing. The amendment was upheld by the Supreme Court, and as a result, a single allottee could approach the NCLT under Section 7 of the IBC to start an insolvency proceeding.
 
However, much before the IBC was amended,  Rera was made available to the allottee as a legal recourse in case of non-receipt of developed flat/plot within the stipulated time. Sucharita Basu, partner, Aquilaw, pointed to Section 18 of Rera which states in the event of failure by a developer to hand over ready and complete flat/plot to the allottees within the stipulated time, the allottees are entitled to refund of the money paid together with interest. “It appears that the only requirement for projects to be eligible for financing from the AIF is its registration under Rera,” she added. In the wake of the recent move, however, Rera may need to be reviewed.
 
Manoj K Singh, founding partner, Singh & Associates, said several real estate projects that have not adhered to the committed deadline. “Consumer courts have awarded orders for refunds with interest. Most of these projects have been pending completion from 2013. If refund and interest are calculated over five years or more, the liabilities will be huge and no project will be net-worth positive and hence may not qualify for funding," he said.
 
One criterion laid down by the government for the selection of projects for funding is that projects have to be net-worth positive. Net-worth positive, as defined by the government, are projects where the value of receivables plus the value of unsold inventory is greater than the completion cost and outstanding liabilities at the project level. Therefore, according to Singh, it is imperative that these orders are set aside and Rera is amended to allow a revised timeline for completion of projects.