As per Anarock’s report on ‘Update on IBC in Indian Real Estate‘, the share of real estate in recoveries under insolvency and bankruptcy code rose to 18.8%.
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From an optimistic future outlook, the Indian real estate market appears bright. According to a Concorde analysis, the real estate industry is expected to develop at a strong 9.2% CAGR between 2023 and 2028. By 2030, the Indian real estate market is projected to be worth US$1 trillion, and by 2025, it is anticipated to account for 13% of the nation’s GDP.
However, the Indian real estate sector has long grappled with challenges ranging from delayed projects to disputes between developers and homebuyers. Amidst this backdrop, amendments to India’s insolvency laws have emerged as a potential game-changer in transforming the real estate landscape.
As per the IBBI Quarterly Newsletter, as of 31st December 2023, ~21% of insolvency processes comprise resolution process, ~14% of insolvencies received resolution plans and ~18% of cases admitted to liquidation pertain to the real estate sector.
As per the latest Anarock’s Report on “Update on IBC in Indian Real Estate, “the share of real estate in recoveries under insolvency and bankruptcy code rose to 18.8%. These numbers signify the importance of the sector.
Thus, the regulator brought amendments, aimed at promoting the resolution of distressed projects on a case-by-case basis, signalling a significant shift towards safeguarding stakeholder interests and revitalising the sector.
The Change:
The Colloquium on Functioning and Strengthening of the IBC Ecosystem, in November 2022 recommended that the insolvency law may provide that a resolution mechanism tailor-made to address the needs of the real estate sector be specified with necessary variations from the resolution process, including project-wise admission and resolution, delivery of completed house to homebuyers during the resolution process, allowing homebuyers to become resolution applicant, etc.
Therefore, to address some of the concerns the insolvency & bankruptcy board floated a discussion paper on 6th November 2023 dealing with certain issues being faced by insolvency processes of real estate projects including issues to examine and invite separate plans for each project.
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While the discussion paper invited public comments concerning amendments to address various issues being faced by real-estate projects, however, only a couple of issues were finally notified by the insolvency board by way of an amendment on 15th February 2024. The major amendment enables resolution professionals to invite a resolution plan for each real estate project or group of projects of the ailing real estate debtor, after the approval of a committee of creditors.
The debtor who is connected to real estate typically has several projects in various stages of development. Certain projects are in the beginning stages of construction, while others have been fully finished. Nevertheless, the number of resolution applicants is constrained because it takes a significant number of resources for one resolution applicant to invest in every project. It is sometimes seen that certain potential seekers prefer to work on particular projects rather than all of them.
Furthermore, several bids for several projects can result in a higher price than one bidder for the whole company. As a result, the regulator suggested making it clear that resolution professionals may invite separate plans for each project following the committee of creditors’ approval. It was believed that it would also motivate the association of genuine state project allottees to present their problem-solving strategies and address challenges inside a particular project. It was also felt that the bankruptcy of one project shouldn’t have an impact on another that is still in progress.
In line with the project-wise resolution approach, the regulator also mandated resolution professionals to operate a separate bank account for each real estate project should the debtor have multiple real estate projects.
The Impact:
The amendments providing project-specific resolution approaches represent a paradigm shift in the approach toward resolving distressed real estate projects. By prioritising stakeholder interests and promoting case-by-case resolutions, the amendments herald a new era of transparency, accountability, and efficiency in the sector.
The project-specific approach enables the resolution applicant to cherry-pick the real estate project instead of exposing itself to the burden of all projects of real estate debtors. This approach will also allow attracting more funding for the revival as it allows greater flexibility to resolution applicants to have a focused approach towards specific projects they are interested in. This also enables us to take care of other vital aspects such as arriving at realistic valuations, stakeholders’ consultation, project-specific liabilities, etc.
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In embracing these amendments, India demonstrates its commitment to fostering a conducive environment for investment and economic prosperity. It also shows that the regulator is agile to the needs of the sector and dynamic enough to embrace the changes. However, this needs clearer regulations dealing with nuances involved in the process.
