As of June this year, insolvency resolution process has been initiated against 421 real estate companies — the maximum from any sector. Add the insolvencies in the construction space, and the number goes up to 648. Of these, 410 are ongoing — evidence of the fact that the problem is not limited to the poster boys: Jaypee Infratech Ltd., Amrapali Group, Unitech Ltd. and the most recent entrant to Insolvency and Bankruptcy Code — Raheja Developers Ltd.
It’s perhaps the magnitude of the problem which prompted the finance minister to hint that the government is considering policy solutions to address the grievances of homebuyers. But experts BloombergQuint spoke with said there is no one-size-fits-all solution possible as every project has uniquely problems.
Take for instance, the Amrapali Group, where the Supreme Court has directed NBCC Ltd. to complete the unfinished housing projects in Noida and Greater Noida. While the judgment was widely lauded, it marks the beginning of another uphill task for homebuyers.
Even after a conclusive ruling from the apex court, challenges continue. In its latest application to the Supreme Court, a copy of which BloombergQuint has reviewed, NBCC had stated that ongoing projects — Eden Park and Castle — are getting delayed due to paucity of funds—Rs 7.60 crore is required to complete these projects. In its Aug. 26 order, the Supreme Court has directed its registry to release Rs 7.16 crore, from the money deposited by the group, to NBCC (India) Ltd.
For the remaining projects, NBCC had sought the Supreme Court’s approval to set up a high-powered committee consisting of a retired judge, a technocrat, and a bureaucrat. This committee will oversee the implementation of the projects.
Homebuyers are already feeling aggrieved with these developments. If you look at NBCC’s proposal to the Supreme Court in September 2018, cost-to-construction for Eden Park and Castle was Rs 7.15 crore. In their August 2019 affidavit, it’s gone up to Rs 9.09 crore — they’ve included the legal and due diligence cost this time around, Amit Gupta, a homebuyer in these projects said.
This is okay as long as homebuyers aren’t asked to give this amount. Further, the high-powered committee has no representation from homebuyers. We will bring up these issues in the next hearing,Amit Gupta, Homebuyer, Amrapali Group
Unitech’s homebuyers are waiting in queue after ‘Ram Lalla’. “Our case is before Justice Chandrachud’s bench who is tied-up with Ayodhya case. Perhaps we’ll get a hearing date once this matter concludes,” Vivek Tyagi, president of the All India Association of Unitech Homebuyers, told BloombergQuint.
Court delays aside, homebuyers aren’t agreeable to the government’s proposal of putting NBCC in-charge of overseeing the completion of stalled projects, Tyagi said.
Homebuyers of 74 stuck projects are unanimously opposing this proposal of getting NBCC involved. They’ve proposed an 8 percent project management consultancy fee. In each project, we have a resident welfare association — those should be empowered to supervise the completion, quality of construction, etc. Why get another party and create 8 percent additional expense?Vivek Tyagi, President, All India Association of Unitech Home Buyers
When asked where the resident welfare associations will get the funds from, Tyagi said that the money which has been been allegedly siphoned off by the promoters should be brought back. “We have studied Unitech’s balance sheet, and Rs 4,500 crore is lying in 32 shell companies,” he added.
“We have given the evidence to the court and investigative agencies. Banks knew what was going on at Unitech. Now they should be asked to give the funds for construction, and once the money from the shell companies is recovered, lenders should be paid. The funds that banks give should be interest free so that they are also penalised,” said Vivek Tyagi, president of All India Association of Unitech Homebuyers.
Jaypee Infratech’s homebuyers recently overcame an important hurdle — decisions being held up as a result of non-participation in voting. Last month, the Insolvency and Bankruptcy Code was amended to say that if more than 50 percent of the homebuyers, by , approve a proposal, it will prevail. That may help solve the problem of lack of consensus among homebuyers but the divide with lenders continues.
After the creditors’ committee rejected NBCC’s resolution plan twice, the National Company Law Appellate Tribunal allowed the resolution professional to invite fresh bids and extended the insolvency period by 90 days. The homebuyers appealed this decision before the Supreme Court that has granted a stay on fresh bids.
There’s a deadlock between NBCC and the committee of creditors, Abhishek Dubey, a Jaypee homebuyer, said. According to the revised resolution plan, NBCC has proposed to sell the unsold inventory to financial creditors at a price decided by them. The lenders, the plan stated, can then sell these homes in the open market and recover their investment. “This condition is not acceptable to lenders,” Dubey said.
Also Read: NBCC Offers In Supreme Court To Prepare Revised Plan For Taking Over Stalled Jaypee Projects
So, What’s The Solution?
In its recent representation to the Finance Ministry, the Forum For People’s Collective Efforts, a homebuyers’ collective, has proposed a stress fund worth at least Rs 10,000 crore to complete pending real estate projects. “This will clean-up the sector, infuse rapid development, restore faith in the sector, and with strict implementation of RERA (Real Estate (Regulation and Development) Act), the chances of recurrence of such delays will be minimal,” the association has said in its letter.
But a stress fund might not be a good idea — who do you give the funds to and who do you leave out, on what terms should such a stimulus be given, argued a former public sector banker, speaking to BloombergQuint under anonymity. One option is, this banker said, that the National Housing Bank takes a lead on this as the nodal agency that drives completion of projects and it has to be a case-by-case solution.
Perhaps, Kohinoor CTNL Infrastructure Pvt. Ltd. could serve as one example of how a viable project ran into liquidity issues and has now found a resolution plan. In this case, Edelweiss Asset Reconstruction Company bought over the debt from banks and took the company to insolvency resolution proceedings. The ARC then borrowed money from other lenders as priority debt. The resolution plan of Sandeep Shikre and Associates was approved and homebuyers with claims worth Rs 1,239 crore have been promised delivery of apartments by March 2020. Under the plan, total term loans alongwith interest of Rs 992 crore were restructured into sustainable debt of Rs 550 crore, optionally convertible debentures of Rs 225 crore and optionally convertible redeemable preference shares of Rs 217 crore.
The banker quoted above said that the nodal agency should divide the stranded projects into three categories — first, where there is a genuine liquidity issue because the lending markets have tightened up. In such cases, if the promoters have created land banks, securitise those and give them access to liquidity. Second, where there are allegations of fraud - replace those promoters, get existing lenders to bridge the deficit in funds required to complete the projects, and refund them once the money is recovered, but make sure it gets done. And third, if the projects are just not viable, liquidate them for the of the land. There can’t be one policy solution that will address all stuck projects, this banker said.
RK Bansal, managing director and chief executive officer of Edelweiss ARC agreed, saying it has to be a project-specific solution. Where the project is viable, let a new lender come in with priority debt, existing lenders should agree to make their debt subordinate and complete the project. The new lender can be paid using the pending payments from homebuyers, and unsold inventory, if any. That is one approach. Where money is not sufficient, homebuyers must take control and lenders must agree to a realistic haircut, because even liquidation won’t fetch anything. And finally, where projects aren’t at a mature stage and homebuyers haven’t given much money, it is easier for lenders and buyers to come together, sell the land and proportionately divide the money.
But to ensure that this cycle doesn’t repeat itself, strict implementation of the Real Estate regulations Act, 2016 is key, Bansal said.
In future, RERA should be the right remedy for homebuyers. Most of these projects pre-date RERA. But the state governments must ensure that RERA is implemented with discipline — 70 percent of the funds must be used for the project, etc. Else, we will be in the same situation few years down the line.RK Bansal, MD and CEO, Edelweiss ARC
Another step that the government can take to help homebuyers is to give them extended tax relief, Abhay Upadhyay, member of the Central Advisory Council, RERA, told BloombergQuint.
Homeowners can claim interest deduction on home loans under the income tax laws only for a period of five years. This limitation should be removed as project delays are solely the builders’ fault but honest homebuyers, who have paid their installments on time, are being punished, Upadhyay said.
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