Before 2016, the only remedy available for homebuyers whose housing projects were stalled for various reasons was through the Consumer Forums established under the Consumer Protection Act of 1986. In FY24, over 5,500 cases were filed with the National Consumer Dispute Redressal Commission, and almost 21 percent were related to the housing sector. However, the number of cases resolved through the consumer redressal route has been minimal. It was estimated that 4.1 lakh dwelling units in real estate projects across the country involving ₹4.1 lakh crore were under stress.
The year 2016 saw the enactment of the Real Estate (Regulation and Development) Act 2016 (RERA Act). This provided a dedicated grievance redressal mechanism to the aggrieved homebuyers and a means to rein in errant real estate contractors and companies. Subsequent enactment of the IBC in the same year opened another channel and has been the most favored among the three available remedies. As of March 2024, over 1500 real estate companies were admitted into the insolvency resolution process under the IBC, accounting for 21% of total admissions. One in four cases settled after admission was also from this sector. Of the 891 corporate debtors resolved, 133 were real estate companies, forming 15 percent of the companies resolved.
Insolvency resolution of real estate companies posed a unique set of challenges for the standardized corporate insolvency process. Real estate companies have multiple projects spread across geographies, projects at different stages of construction, and diversified business models. The large number of homebuyers across these projects meant claims from thousands of homebuyers who needed to be included in the process. The judiciary, the Government, and the market have recognized these difficulties and moved in cohesive steps to improve outcomes for these projects. The availability of two new remedial routes led to discord and friction in the system.
The Insolvency Law Committee, in its March 2018 report, took cognizance of the peculiarity of the real estate sector. It was recommended that the amount raised from homebuyers be considered financial debt as it significantly contributed to finances raised and had the commercial effect of borrowing. This led to substantial changes in the CIRP by making homebuyers a distinguished class of creditors and a part of the Committee of Creditors, enabling their direct participation in decision-making. A system to organize and derive decisions, through consensus of majority voting of the thousands of homebuyers, was also worked out to introduce insolvency professionals as authorized representatives. Further amendments enabled insolvency to be initiated by a joint application of at least 100 allottees or not less than 10 percent of the total number of allottees under the same project, ensuring that frivolous applications are not filed. As clarity emerged on the use of IBC as a remedy for homebuyers, it was also laid out that resolution plans approved for real estate projects should necessarily be compliant with the RERA Act, thereby restoring primacy to the sectoral law and the sectoral regulator in its domain for optimal oversight of the sector.
By innovation in economic law, the judiciary paved the way for solutions in resolving real estate corporate debtors. As a class of creditors, it enabled homebuyers to act as resolution applicants. It approved a “reverse CIRP,” where the corporate debtor could take measures to complete the project even as the resolution process was underway. The judiciary has allowed project-specific resolution plans, targeting the affected project alone under the same corporate debtor. This measure relieved the corporate debtors and allottees of different projects, and the market has responded positively.
Several real estate companies have successfully resolved and enabled the progress of stalled projects. In the case of Value Infracon India Private Limited, the resolution process yielded creditors 98 percent of the claim value and 189 percent of the asset’s liquidation value.
In the cases of Ashiana Landcraft Realty Private Limited and Anudan Properties Private Limited, the resolutions yielded around 2.5 times the liquidation value of the assets. Large corporate debtors in the sector, like Jaypee Infratech Limited, have been resolved with a recovery of 88 percent for creditors, and assets have been acquired at over 114 percent of liquidation value.
Even as the pace of resolutions picked up under the IBC, there was still a need to channel/ redirect investments into these stressed projects. To address this vital gap, the Government set up the Special Window for Affordable and Mid-Income Housing (SWAMIH) with a target corpus of ₹12,500 crore in 2019. It is a professionally managed Alternative Investment Fund (AIF) aimed at providing priority debt financing for the completion of stalled housing projects, including corporate debtors and projects undergoing the resolution process under the Code. As of April 2024, the SWAMIH Fund has delivered 32,000+ homes, and the delivery of 20,000 homes every year for the next three years is being targeted.
The impact of seamless resolutions, progress of cases under IBC, and improvement in liquidity through the AIF is reflected in banks’ healthy balance sheets, thereby enhancing their ability to lend further.
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