Real estate sector backs proposed IBC rule change for defaults

Homebuyers are likely to benefit from a government proposal to have individual project resolution in the real estate sector under the Insolvency and Bankruptcy Code (IBC) framework, experts said.

“Under the proposed framework related to corporates that are promoters of real estate projects, insolvency provisions would be applicable to projects where default has been reported. Thus, there would be minimal disruption to other projects of the same company,” said Anshuman Magazine, chairman and chief executive officer (CEO), India, South East Asia, Middle East & Africa, CBRE, a real estate consultancy firm.

The government proposes a special dispensation to initiate Corporate Insolvency Resolution Process (CIRP) against a specific project that has defaulted instead of the whole company. Under current rules, when a company becomes bankrupt its other projects are also stalled and this affects a large number of homebuyers.

According to experts, defaults in the real estate sector often pertain to specific projects instead of the whole group. Unlike other financial creditors, homebuyers prefer ownership of their properties rather than repayment of advances. They also do not favour the company to go through the liquidation process.

Homebuyers often struggle to bring committees of creditors (CoC) to their terms due to their divergent interests. A CoC includes all financial, operational and other creditors.

“The move would not only allow more targeted and efficient resolution for real estate companies but would also reduce the burden on the courts and other authorities responsible for overseeing the resolution process,” said Prashant Thakur, senior director & head--research, Anarock Group.

The IBC framework is designed for resolution within the timeline of 330 days. However, according to a Khaitan Anarock IBC report published in December 2022, the median duration for acceptance of a resolution plan takes longer.

The report said the real estate sector comprises just 5 per cent of all cases under IBC but its resolution rate is among the lowest. “Resolving insolvencies in real estate can be a particularly challenging task given the potentially large number of claimants, multiple and potentially opaque and uncertain regulatory processes, prospect of cost escalations and inadequate information."

The proposed norm will also help homebuyers facing difficulties in availing Income Tax benefits when a company goes through the resolution process.

The norm will help players wanting to take over stressed projects. Currently, potential investors have to take over an entire bankrupt company, deterring many.

Kalyan Chakrabarti, CEO of Emaar India, said the proposed norm would protect the healthy projects of a company from the impact of insolvency proceedings for other projects.

“For the economy, and the ecosystem including the customers, supply chain, financial institutions and the developers would see the risk of business coming down, at the project level and hence it is a great step to improve ease of doing business,” Chakrabarti said.