Residential and commercial buildings are seen from a show home at Lodha Altamount, a luxury residential project developed by Lodha Developers Ltd., in Mumbai, India, (Photographer: Dhiraj Singh/Bloomberg)

Treating Homebuyers As Finance Creditors Raises Developers’ Default Risks, ICRA Says

Treating homebuyers as financial creditors under the bankruptcy law has increased the default risks for developers with delayed projects, warned a report by rating agency ICRA.

Last August, Parliament had passed an amendment to the Insolvency and Bankruptcy Code allowing homebuyers to be treated as financial creditors.

In recent months, there have been various instances of aggrieved homebuyers initiating insolvency proceedings against developers who have delayed project execution.

The time-bound nature of the insolvency process provides a limited window for developers to reach settlement with the aggrieved buyers, failing which the resolution professional takes over the management, ICRA said in its report on Tuesday.

According to a report by rating agency ICRA as the amounts paid by homebuyers now constitute a financial debt, any delay in handing over the property as per the commitments in the sale agreement can be ground for initiating the insolvency proceeding under the IBC.

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"Even a single buyer in a single project pursuing such a remedy can put the company at risk of financial default, irrespective of the liquidity position of the company," the report warned without quantifying the defaults by the number of companies.

Managing such risks will be a challenge for developers, especially those who have legacy projects where completion has been affected by factors such as weak sales, falling prices or inadequate funds, it added.

According to the Insolvency and Bankruptcy Board of India’s website, some companies against whom claims were admitted in recent months include Puri Construction, Pioneer Urban Land & Infrastructure, Emaar MGF Land, Vardhman Buildtech and Sikka Infrastructure.

Some of these companies could reach settlements with the claimants resulting in closure of the insolvency proceedings, the report said, adding that in some other cases they could not obtain a stay on the proceedings from the Supreme Court.

"However, if such remedies are not in place before the resolution professional takes over the management, debt servicing can be at risk as the RP may decide to enforce moratorium on any such payments while the resolution proceedings go on," the report said.