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

Hindustan Times (Chandigarh) - Estates - - FRONT PAGE - Mu­niesh­wer A Sa­gar mu­niesh­­gar@hin­dus­tan­

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 mis man­age­ment prac­tices is now be­ing reme­died.


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 real is ed 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 pro- 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 The amounts from the sep­a­rate ac­count shall be withdrawn by the pro­moter after it is cer­ti­fied by an en­gi­neer, an ar­chi­tect and a char­tered ac­coun­tant in prac­tice that the with­drawal is in pro­por­tion to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.”


Ear­lier this month, the In­sol­vency and Bank­ruptcy Code Amend­ment Or­di­nance, 2018 (I BC) 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 the mata dis­ad­van­ta­geous po­si­tion and ex pos­ing 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 RE RA ,” says, N iran jan Hi ran an­dani, 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, A narock 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 in­sti­tu­tion sand­banks, 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 for 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 are so­lu­tion pro­fes­sional to rep­re­sent their rights and in­ter­ests,” says Puri.


The changes may hurt credit rais­ing po­ten­tial of builders from banks.

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