Real Estate in deep Trouble : Possible Solutions

Real estate has always been the most reliable and preferred mode of investment in our country. Further, Indians have been major believers of having our own house, have always strived for owning their own homes. It is this belief which had brought a boom in Indian Real Estate sector till 2013-14 and brought a number of shady and unscrupulous people in the industry who availed benefits of unrealistic and impractical government schemes and turned into builders overnight.

However, when this bubble burst, it was revealed that these builders had siphoned of or diverted huge funds paid to them by their unsuspecting customers in other projects or in their own pockets leaving a large number of projects stranded or unfinished. Apart from the above, land acquisition by the Government and other approvals granted to the builders were also challenged in various courts which led to stay on construction.   This forced the banks and other financial institutions to hold their hands and stop financing the projects. The buyers having lost their faith in the builder’s ability to construct have also stopped payment of their installments which has caused a huge liquidity crunch in the real estate industry which in turn resulted in debt payment defaults forcing the financial creditors to invoke the provisions of Insolvency and Bankruptcy Code, 2016. This invocation of Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution process (CIRP) has forced the buyers who are wary of liquidation of the Real Estate companies to knock on the doors of Supreme Court. Further, Insolvency and Bankruptcy Code, 2016 was enacted without considering the impact of home buyers which has now forced the legislature to come out with various amendments to plug the loop holes. However, these amendments instead of solving the problems have furthered them which has now resulted in Supreme Court staying the proceedings in Applications filed by buyers before NCLT against a large number of builders.

It may also be relevant to add that NBCC has proposed to take over or complete some of the larger projects like Jaypee, but it is impossible to hand over all the stranded projects to NBCC for completion. Further, such a step may amount to virtual nationalization of the real estate sector which not be conducive for the economy either. 

So, what are the possible solutions to this nightmare? To explore the solutions, it is necessary to divide the projects in three different categories as under:

a.    The projects which are networth positive

b.    Projects which are networth negative

c.     Projects where no construction is done and no funds are available

I.               THE PROJECTS WHICH ARE NETWORTH POSITIVE

Some of these kind of projects are Intellicity, Urbania, Earth Infrastructure.    

i.               The projects which are networth positive but are stuck due to lack of cash in hand can be completed with a little help from the banks and financial institutions.

ii.              These projects have amounts due from the buyers or have adequate inventory or land available which can be monetized to repay the banks or financial institution on a “Last In First Out” (LIFO) model  for completion.

iii.             The money to be financed must be kept in an escrow account under the control of a monitoring committee comprised of home buyers and RERA officials to ensure that the same is being utilized for construction and the quality is not compromised.

II.             Projects which are networth negative

Most of the stuck projects fall in this category.

i.               The biggest problem in these projects is to identify the reasons for the project being networth negative. These projects are mostly where buyers have already paid a major part of the price of their flats (in some cases, upto 100%) but construction has been stuck due to fraudulent practices of the builder.    

ii.              To understand the problem, the first step is to compulsorily conduct a forensic audit of these projects and thereafter, recover the diverted amount from the promoters who must be punished for the fraud committed by them on the hapless buyers.

iii.             The Second step has to identify the assets of these builders which can be monetized and then take steps to either sell them or to mortgage them with banks to raise funds for the projects.

iv.            In these cases, the Government will have to lend a helping hand either by way of creating a stress fund or by bringing in a co- developer who may be granted additional / increased FSI in the project or elsewhere in lieu of his investment.

v.              It may be clarified that such additional / increased FSI must be in proportion to his investment and can be a one time measure for public interest.

vi.            The Registration of these builders must be cancelled in terms of Section 8 of RERA Act which empowers RERA to then get the projects completed by the Competent authority or through association of buyers. The only problem in these cases is that either the Competent authority is not equipped to take over and complete the construction or the buyers are divided and there is not unanimity in getting the construction completed.

vii.           In these cases, it is imperative to ensure that the competent authority is empowered to construct these projects. It may also be provided that the association of buyers may be constituted under the aegis of RERA which may contribute and take over the project for construction.        

III.            Projects where no construction is done and no funds are available

i.               Most of these projects are the ones where either approvals were not taken or which were being launched by fly by night operators.

ii.              In these cases, if it is possible to grant approvals, the same may be granted and the projects can be completed by the competent authorities or co-developers in the manner mentioned above.

iii.             However in case it is not possible for the project to be completed, the builder must be apprehended and punished and the money taken by him, be recovered for returning the same to the consumers.

GENEREAL SUGGESTIONS

Apart from the above, few steps are necessary to bring back the faith of the buyers in real estate sector being as under:

a.    The repayment of home loans must be linked to handing over the possession by the builders and till the time, possession is not handed over, there must be an EMI Holiday. Therefore, banks will monitor the construction and will ensure timely completion of the project.

b.    At least in those projects which are stuck or stranded, there must be an EMI Holiday till the date of completion.

c.     There is a huge uncertainty today in view of Insolvency and Bankruptcy Code, 2016 which can be invoked not just by home buyers, but also by banks and other operational creditors for recovery of their dues without having any concern for the completion of the project. Further, in those projects which are networth positive, some Resolution plans are received, but in a large number of cases, no resolution applicant comes forward , which may cause liquidation of the project in which case, the buyers being unsecured financial creditors will not get anything.

d.    In view of the same, at least in real estate cases, RERA should be made the first point of call and only when RERA fails to ensure the completion, NCLT or NCDRC may be approached.