India's real estate market has seen several significant administrative changes in the last two years by the way of new rules, amendments, new tax systems and the like. The most recent has been an amendment to the Insolvency and Bankruptcy Code (IBC), which effects buyers as well as developers. To understand the amendment and its proposed effects, it is necessary to first understand what the code means.
The IBC Bill, which received President's assent on 28th May 2016, consolidates all insolvency-related laws into a single law. Insolvency is a situation where debtors, individuals or corporates are unable to repay their debts. Bankruptcy is an extension of this; it is the formal declaration of insolvency.
IBC is a watchdog of the developer's activities. Developers are more accountable now and fear to lose their company as a consequence of this code. In fact, a TOI report stated under the IBC, dues of around ₹83,000 crores have been settled by companies who defaulted on repayment of loans to banks.
Earlier, only banks and other financial institutions enjoyed the status of primary creditors, meaning that they would recover their money from developers via the sale of assets. If any money were remaining, the buyer would get his money back. This was because home buyers were considered unsecured creditors, which means that their payments to the builder were put at a lower rank than that of the banks. However, the latest amendment to the code requires financial institutions to treat home buyers also as secured financial creditors.
Home buyers should be considered equal, if not above the traditional lenders. In terms of money invested, home buyers are not just creditors, but also customers to these developers. Their primary motive behind such investment is not getting returns (like banks), but the delivery of the good (and services) that was offered to them. Therefore, it is unfair to home buyers to not be on the receiving end of recovery money in case of delayed or failed possession.
Until now, the situation was such that home buyers had to appeal to the courts and struggle indefinitely for compensation, while other stakeholders profited at their cost. Lately, many developers have been under the radar for not having delivered proposed projects on time, or not having delivered projects at all. In some cases, the bankruptcy resolution matter was taken to the court where the ruling was given in favor of the buyers.
Status of home buyers as secure creditors will leave them in a beneficial position where developers will be directly accountable to them. This amendment can, thus, go a long way in putting an end to the malpractices of unscrupulous developers from defrauding home buyers with promises undelivered.
One can say that amendment to the IBC will work in support of RERA, the primary goal of which has been to protect the rights of buyers by ensuring timely and honest delivery. Yes, upholding homeowner rights can cause relative disadvantage to developers and large creditors like banks, but it is still a step ahead in developing a transparent and more efficient real estate market.