Making builders financially accountable
After Rera Act tightened financial control over builders, now amendments made in Insolvency and Bankruptcy Code have added to their financial security
CHANDIGARH: Long possession delays or builder failing to complete a realty project has been endemic to the housing sector. Mismanagement of home buyer funds collected by the builder for constructing a project is the problem.
Often builders are accused of diverting allottee collected funds to accumulate land banks or even wasting it on personal consumption instead of spending it on the project development.
Lack of adequate legal framework to curb builder financial mismanagement practices is now being remedied.
RERA FINANCIAL SAFEGUARDS
The Real Estate (Regulatory and Development) Act 2016 tries to ensure that the home buyer funds are not mismanaged or misused by the builder. The Act lays down that the builder has to deposit 70% of the amount realised for the real estate project from allottees, from time to time, in a separate account to be maintained in a scheduled bank to cover the cost of construction and land cost and shall be used only for that purpose.
The Act also regulates the spending of the funds: “The profor moter shall withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project. The amounts from the separate account shall be withdrawn by the promoter after it is certified by an engineer, an architect and a chartered accountant in practice that the withdrawal is in proportion to the percentage of completion of the project.”
ALLOTTEES AS CREDITORS NOT JUST CONSUMERS
Earlier this month, the Insolvency and Bankruptcy Code Amendment Ordinance, 2018 (IBC) was promulgated recognizing home buyers status as financial creditors.
“This will grant home buyers equal priority as banks and other institutional creditors while recovering dues from stressed or insolvent realty firms,” says Ramesh Nair, chief executive officer and country head, JLL India.
Previously, if any realty firm went through bankruptcy, the priority of recovering dues from the project was first given to financial creditors such as banks and institutions, followed by operational creditors such as vendors and employees.
“Homebuyers were widely regarded as merely consumers and did not specifically fall under the liquidation claim waterfall, placing them at a disadvantageous position and exposing them to significant risk upon investment in under-construction projects,” adds Nair.
“The changes in the IBC are positive for home buyers who have booked an under construction home, and for some reason, the project gets stalled – and the builder defaults. The safety factor for the buyer has been enhanced post changes in the IBC as also RERA,” says, Niranjan Hiranandani, president, NAREDCO (National Real Estate Development Council).
This amendment is expected to bring more transparency into the overall funding of projects across the country, says Anuj Puri, chairman, Anarock Property Consultants. With homebuyers now getting the opportunity to claim their dues from builders,
“There is an even stronger burden on developers to deliver on time. We will now see builders become more cautious while taking funds from financial institutions and banks, as they would now also be accountable to homebuyers as well as the financial institutions if their business goes belly-up,” adds Puri.
On the downside, say real estate experts, the changes may hurt credit raising potential of builders from banks.
“From the perspective of the real estate industry, this has a negative connotation in the sense that banks which were in any case, not very positive when it came to providing credit to real estate projects, now will be even more unwilling to lend to real estate projects, as their ‘priority position’ in case of a default gets impacted as a result of changes in the IBC. So, credit for real estate projects was anyways a challenge, now it will become even more difficult. It needs to be understood that with the provision of escrow in RERA, 70 percent of funds collected from buyers/ end-users for the project are exclusively kept for the project, which increases the challenge of procuring finance for the project,” says Hiranandani.
However, it needs to be seen how the resolution mechanism claiming the dues actually falls in place for the concerned homebuyers.
“In fact, to be truly relevant, the entire implementation process needs to be clarified to homebuyers. They need to know how exactly they will be represented in the creditors’ committee – in other words, whether the NCLT (National Company Law Tribunal) will appoint a resolution professional to represent their rights and interests,” says Puri.