The recognition of home buyers as financial creditors under the bankruptcy law may well turn out to be the most important legal development ever in India's real estate industry. In fact, it is likely that it will have a deeper, more positive and more immediate impact than the Real Estate Regulation law which was passed last year, and which is still in the process of being implemented by the states. The main reason for this is that the 'Insolvency and Bankruptcy Code Amendment Ordinance, 2018' can solve what is actually the biggest problem that existing home buyers are facing today, and unlike the RERA law, can do so on a retrospective basis for existing victims of unscrupulous developers.
I'd written about this issue a few weeks ago but at that time, the exact change in the ordinance had not been revealed publicly. It was still not known whether home buyers would be at a par with financial lenders. It turns out that they are.
Effectively, the law now incorporates the on-ground reality, which is that homebuyers are not just customers, but also a source of capital for developers. A large part of the finance needed for private builders' housing projects comes from homebuyers and therefore, unlike customers of other types of products and services, they are financial creditors. Those who are criticising the changes on the ground that customers are being treated as lenders are choosing to ignore this.
This is actually a historic change in the legal structure of buying a home. It will not only affect most of the existing problem projects, but also how all housing projects are planned and funded in the future. The impact on currently distressed homebuyers is obvious. Once the Bankruptcy Board has formulated the detailed procedure by which home buyers can organise themselves, one expects a large number of housing projects being taken to the bankruptcy process. It's possible--even likely--that the mere prospect of this happening will trigger some kind of a resolution in many such cases, as it has done till now for other kinds of companies.
It's also likely that in some cases, the developer is genuinely bankrupt and there is no prospect of any meaningful recovery. In those cases, the insolvency process will start and then the homebuyers will have to argue their case along with other creditors. It's notable that the amended law does not take a view as to whether homebuyers are secured creditors or unsecured ones. Apparently, this will have to be argued out based on the nature of agreement.
However, whichever way the older cases go, going forward, the new dispensation will impact future housing projects. The fact that by taking an advance from a customer, a financial creditor is being created will no doubt be a factor. Similarly, institutional lenders will have to recognise that a developer who is succeeding in selling apartments in advance to homeowners is, in fact, taking on what will effectively be competing debtors in case the project becomes insolvent. There is also bound to be pressure from institutional lenders to structure sale agreements in such a way that homebuyers' claims will be junior to theirs in case a project fails.
Like any far-reaching change, there will be some unintended consequences that will have to be fixed, as has been the case for other parts of the bankruptcy law. However, no matter what happens, the amended law is a huge step forward for homebuyers' welfare. To a large extent, a part of what we expected RERA to deliver has been done by this law. While RERA is dependent on state governments and is getting implemented at a varying pace, the bankruptcy law is now in effect across the country uniformly. It's impact will be felt pretty soon, and likely in a large way.
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