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A tweak to the bankruptcy code

Will recognising home buyers as financial creditors lead to a solution to the real estate crisis?


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According to news reports, the bankruptcy law is to be amended by an ordinance in order to recognise home buyers as 'financial creditors'. Presumably, this will allow them a better chance of recovery from real estate developers who took their money and did not deliver the promised houses. One can't be sure of exactly what is being changed in the law because even though this ordinance has been cleared by the Union Cabinet, the amendments themselves will only become public knowledge once the president has signed the ordinance.

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Of course, we will know the real efficacy of the amended law only when some action results. One hopes that it will not be long before the lakhs of distressed home buyers start bankruptcy proceedings against real estate developers. What happens subsequently depends a lot on the exact changes that are made to the bankruptcy law. Will home buyers' claim have a higher priority than that of secured financial creditors like banks and other institutions? If they aren't, then the law may not achieve much.

If the amendments to the bankruptcy code still treat financial institutions as having superior rights to home buyers, then nothing much will come out of the whole business. However, one does have some hope as this amendment was triggered by the Supreme Court's decision on the bankruptcy proceedings against Jaypee Infratech in a petition filed by home buyers. In that case, as per the existent bankruptcy law, home buyers were being treated as simply consumers whose claims had a lower priority than anyone else. In the bankruptcy law, customers who have made an advance payment for any goods or service come last, not just after the government (obviously) and financial creditors but also 'operational creditors' like suppliers and employees.

Some time ago, I wrote a column that started with the sentence, 'India's real estate business should be seen not as an industry in crisis, but as a crime scene.' The tremendous amount of mail I got in response to that article makes me think that most home buyers' would still agree with that statement. In their opinion, the fact that the wholesale appropriation of customers' money is going to be a matter to be judged under a white collar law like the bankruptcy code is itself a huge let-off for developers. In any case, many developers are functionally bankrupt, and what homebuyers will actually recover is very much up in the air, even if the amendments proves to be genuinely friendly to home buyers.

In reality, what has happened in large parts of the country is actually an organised embezzlement, and many developers should be treated as criminals and prosecuted as such. The Uttar Pradesh government has started doing so and there has been some real on the ground impact.

The scale of this problem is actually larger than the bank NPA crisis. The only difference is that the financial crisis is spread out amongst lakhs of individual families so it's not visible. According to most estimates that I have come across, in the Delhi-NCR area alone, there are at least 300,000 apartments that are delayed for more than two years. This probably means a minimum of Rs 3 lakh crore that is stuck in a limbo.

Each individual case or a given project has some story about the delay. However, if one steps back and takes a broad look, it's a different story. What has actually happened is a large scale criminal embezzlement of the hard earned money of lakhs of families. In a good proportion of these cases, the developer has used the customer basically as a conduit for getting bank finance. The money has gone from the bank to the developer and then disappeared, while the liability to the bank is that of the customer, who is on the hook for paying EMIs for years and years.

When I look at the entire problem holistically, it's hard to see how a tweak in the bankruptcy code can be a real solution. Eventually, there will have to be an all encompassing solution that recognises the true nature and scale of the problem and is able to move towards something that delivers justice--and hopefully, houses--to the victims.

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