The Hindu Business Line

A tale of three de­vel­op­ers — will the law catch up?

- AARATI KR­ISH­NAN Washington Metropolitan Area · India · Noida · Greater Noida · Supreme Court of India · National Buildings Construction Corporation Limited · Aman Resorts · New Delhi · Maharashtra · South Carolina · Union

The tra­vails faced by nearly 1 lakh home-buy­ers in the Na­tional Cap­i­tal Re­gion af­ter sign­ing up for hous­ing projects with three lead­ing de­vel­op­ers — Unitech, Am­ra­pali and Jaypee — ex­em­plify all that was wrong with In­dia’s real es­tate sec­tor, be­fore the Courts and leg­is­la­ture sought to re­form it in the last three years.

Tak­ing a di­ver­sion

Take the case of the Am­ra­pali group, on which the Supreme Court or­dered an En­force­ment Di­rec­torate in­ves­ti­ga­tion in a judge­ment last week. Over 42,000 hope­ful buy­ers had booked flats in Am­ra­pali’s projects in Noida and Greater Noida be­tween 2010 and 2014, based on ex­pected com­ple­tion time of 36 months. But seven to nine years on, af­ter tak­ing on home loans and cough­ing up 50 to 100 per cent of their dues, th­ese projects are nowhere near com­ple­tion.

Af­ter ap­proach­ing the con­sumer courts in 2017 and ward­ing off ac­tion by lenders in the NCLT, buy­ers pe­ti­tioned the Supreme Court of In­dia for some jus­tice. The SC, af­ter a foren­sic au­dit of the books, found ev­i­dence of ram­pant di­ver­sion of funds amount­ing to over ₹3,000 crore to­wards pet ven­tures and per­sonal ex­penses of the pro­mot­ers.

One-sided agree­ments, which gave the devel­oper lien over the prop­erty even af­ter full pay­ment by buy­ers, helped the devel­oper raise bank loans. In its judge­ment, the SC has come down hard on the devel­oper by can­celling its land leases, hand­ing them over to a Court Re­ceiver and or­der­ing the pub­lic sec­tor NBCC to take over the com­ple­tion of pend­ing projects. It has also passed

Fury

Home-buy­ers who booked flats in Jaypee Group’s Wish Town and Jaypee Aman hous­ing projects protest­ing in New Delhi (file photo)

stric­tures on banks and the Noida au­thor­i­ties, pre­vent­ing them from at­tach­ing any of the prop­erty funded by home­buy­ers, given their fail­ure to ful­fil their ba­sic fidu­ciary du­ties.

The or­deal of 16,000 flat-buy­ers in the 74 pan-In­dia projects de­vel­oped by Unitech has lasted even longer. Buy­ers in Unitech’s projects have waited be­tween 7 and 12 years af­ter pay­ing up, as the pro­mot­ers ac­cu­mu­lated a moun­tain of debt through un­re­lated di­ver­si­fi­ca­tion, got em­broiled in the 2G scam and were even­tu­ally hauled to the NCLT by lenders. Af­ter fil­ing cases with the con­sumer court and Delhi po­lice, flat­buy­ers, in this case also knocked at the SC’s doors for rem­edy, which has again roped in the NBCC as the white knight.

In both th­ese cases, though the SC has ruled in favour of home-buy­ers, loose ends re­main. Given that the NBCC will not de­ploy its own funds in res­cue ef­forts, it will need to scrounge up enough

money from home-buy­ers’ dues and resid­ual assets to com­plete th­ese mam­moth projects, lead­ing to an un­cer­tain time line for com­ple­tion.

Tug of war

Un­like the Am­ra­pali or Unitech case, the bat­tle of 30,000 home-buy­ers in Jaypee In­frat­ech’s projects in Noida is be­ing fought mainly in the in­sol­vency courts. With lenders drag­ging Jaypee to NCLT for non-pay­ment of dues, first there were pro­longed par­leys on whether home-buy­ers de­served a seat on the Com­mit­tee of Cred­i­tors that would de­cide on the res­o­lu­tion process. The mat­ter was set­tled by the Cen­tre amend­ing Sec­tion 7 of the In­dian Bank­ruptcy Code to give the al­lot­tees of real es­tate firms the sta­tus of deemed fi­nan­cial cred­i­tor in 2018. With this change, home-buy­ers were vested with pow­ers to trig­ger in­sol­vency pro­ceed­ings against re­al­tors and seek rep­re­sen­ta­tion in the Com­mit­tee of Cred­i­tors. Then this amend­ment was chal­lenged by the de­vel­op­ers’ lobby, and fi­nally up­held by the Supreme Court this week.

Mean­while, lenders and home-buy­ers are en­gaged in a tug-of-war on the res­o­lu­tion. While lenders are keen on liq­ui­dat­ing the firm to max­imise their re­al­i­sa­tions, home-buy­ers are in favour of sale to bid­ders who can com­plete their pend­ing projects.

Bro­ken con­fi­dence

The tale of th­ese three de­vel­op­ers pretty much sums up why In­dia’s real es­tate sec­tor, sad­dled with huge un­sold in­ven­tory, is now strug­gling to woo new buy­ers. For decades, the in­dus­try has meted out cav­a­lier treat­ment to its con­sumers, col­lect­ing hefty ad­vances for projects that re­side only on pa­per, ro­tat­ing cus­tomers’ funds for work­ing cap­i­tal re­quire­ments, di­vert­ing money from one project to an­other with im­punity and even si­phon­ing it off to pri­vate cof­fers. But with th­ese skeletons now tum­bling out of the closet, this flawed busi­ness model has col­lapsed.

The scale of this prob­lem is ev­i­dent from a report by Anarock Prop­erty Con­sul­tants, which es­ti­mates that 220 hous­ing projects across top seven cities in In­dia have 1.74 lakh homes stuck in var­i­ous stages of con­struc­tion. Of th­ese, a whop­ping two-thirds or 1.1 lakh homes have al­ready been sold to buy­ers, leav­ing them out in the cold.

There ap­pears little choice for home­buy­ers in th­ese legacy projects but to wait it out. But for fu­ture home-buy­ers in In­dia, the RERA or Real Es­tate Reg­u­la­tion and Devel­op­ment Act en­acted by the Cen­tre in 2016 prom­ises to make life much eas­ier. The RERA plugs pre­cisely the flaws in the realty busi­ness model that have been re­vealed by the Am­ra­pali, Unitech and Jaypee cases.

RERA reboot

The RERA re­quires de­vel­op­ers to regis­ter ev­ery new project with a lo­cal RERA au­thor­ity, ad­here to stan­dard con­tract terms, se­quester buyer funds in an es­crow ac­count for use in the same project and cough up heavy penal­ties for de­lays in com­ple­tion. It also em­pow­ers home­buy­ers to file com­plaints with the ad­ju­di­cat­ing au­thor­ity in their re­spec­tive States against de­vel­op­ers, for vi­o­la­tion of rules or con­tract terms. Some States have also set up Con­cil­i­a­tion Fo­rums to re­solve buyer com­plaints ahead of ap­proach­ing the Courts. In ef­fect, RERA seeks to add an­other more ac­ces­si­ble re­dress fo­rum for home-buy­ers, in ad­di­tion to ex­ist­ing av­enues such as con­sumer courts, NCLT and the ju­di­ciary.

While the RERA is a sound law that rewrites the un­even equa­tion be­tween In­dian home-buy­ers and de­vel­op­ers, its suc­cess in safeguardi­ng buyer in­ter­ests will de­pend on its adoption and strict en­force­ment by in­di­vid­ual States. On this score, it is note­wor­thy that in the first cou­ple of years af­ter the Cen­tral RERA was en­acted, most States were still drag­ging their feet.

In the past year, though, Ma­ha­rash­tra has emerged a forerunner in us­ing RERA to re­solve home-buyer dis­putes. The Cen­tre re­cently in­formed the SC that 30 States and Union Ter­ri­to­ries have now im­ple­mented the RERA with 42,276 hous­ing projects reg­is­tered un­der it. Presently, Ma­ha­rash­tra alone ac­counts for nearly half of the RERA reg­is­tered projects. One hopes that the other States, at least in the in­ter­ests of boost­ing real es­tate ac­tiv­ity in their lo­cal economies, will take some cues from it.

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