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Now, homebuyers are financial creditors

NEW DELHI: The Union cabinet on Wednesday approved the proposal to treat homebuyers as financial creditors when a loan defaulter company is auctioned, a move that will help quickly recover investments in bankrupt real-estate companies.

The cabinet headed by Prime Minister Narendra Modi approved promulgation of an ordinance to amend the Insolvency and Bankruptcy Code 2016, Minister for Law and Justice Ravi Shankar Prasad told reporters here.

He, however, did not give details of the amendment proposed but official sources said the cabinet has approved treating homebuyers as financial creditors rather than operational creditors.

Financial creditors like banks get to recover their dues first when a company or its assets are auctioned.

It, however, was not clear if the homebuyer will have a right over the unfinished property he or she had invested in after getting back a part of investment from the bankruptcy proceeds.

As has been the experience so far with loan defaulting companies referred for insolvency proceedings under IBC, the successful bid is hardly enough to cover for all the loans given by financial institutions and banks. They normally get a share in proportion of their exposure. With homebuyers joining the list, the pie would get smaller and banks would have to take a bigger haircut in real estate companies.

On the positive side, homebuyers could recover some portion of their dues in case the builder defaults, as against the current scenario where buyers have to depend on the residual value after financial creditors are paid, which entails higher haircuts.

The amendment comes months after a new Section 29A was added into the bankruptcy code in November, introducing four layers of ineligibility for potential bidders.

It is based on recommendations of a 14-member government appointed committee that had last month suggested a slew of measures, including addressing woes of homebuyers and making recoveries easier for lenders.

Kalpesh Mehta, partner, Deloitte India said the ordinance protects the interest of the homebuyers as financial creditors, and allows them to equitably participate in the insolvency resolution process. Until now, they were not recognised as creditors when real estate companies went bankrupt, and could not be a part of the resolution proceedings.

“But, the new amendment benefits all those who have invested in housing projects that remain unfinished or whose builders are facing bankruptcy. In India, still for a majority of the population buying a house is a onetime investment, and there have been instances when dreams have turned into financial nightmare. This amendment is a proposed relief to all those people whose projects have not seen the light of day,” he said.

Briefing reporters after the meeting of the Union cabinet, Prasad said, “it’s a new legislation… The cabinet has approved it.”

He, however, refused to divulge further details citing constitutional provisions.

Asked if the cabinet has cleared some relief measures for homebuyers as per the recommendations of the panel, Prasad said, “An ordinance, till it is approved by the President, I cannot speak about the details”.

The insolvency law committee had last month recommended to the ministry of corporate affairs that homebuyers should be treated as financial creditors, which will allow them to equitably participate in an insolvency resolution process.

The panel has also suggested relaxations for micro, small and medium enterprises under the IBC by allowing promoters to bid. After Section 29, promoters of loan-defaulting companies cannot bid for any insolvency asset till they clear their dues.

With realty firms, such as Jaypee Infratech, facing insolvency proceedings, the ordinance, once approved by President Ramnath Kovind and promulgated, will provide relief for homebuyers facing hardships due to incomplete real estate projects.

Under the code, financial creditor implies any person to whom a financial debt is owed. The financial debt can include money borrowed for interest.

The panel had suggested that the government should exempt MSMEs from the application of certain provisions of the code. “Illustratively, since usually, only promoters of an MSME are likely to be interested in acquiring it, the applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs,” it had noted.

Section 29A of the Code pertains to ineligibility criteria for bidders.

Besides, the panel had suggested that only those who contributed to defaults of the company or are otherwise undesirable should be ineligible from bidding for stressed assets under the code.

For withdrawal of resolution application in exception circumstances, the panel has suggested that in such cases, there should be approval from the committee of creditors with ninety per cent of voting share.

“In order to facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow one year’s time to obtain necessary statutory clearances from central, state and other authorities or such time as specified in the relevant law, whichever is later,” the committee said.

In January, the IBC was amended to prevent unscrupulous persons from misusing the law. Wilful defaulters and those whose accounts have been classified as non-performing assets, among others, are barred from bidding for stressed assets.

The IBC, which came into force in December 2016, provides for market-determined and time-bound insolvency resolution process.

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