Ordinance: big deal for homebuyers

The ordinance amending the Insolvency and Bankruptcy Code (IBC) to protect homebuyers is a welcome development as it treats homebuyers as financial creditors. This is a potent weapon to fight errant builders, particularly fly-by-night operators who collect monies from homebuyers to finance their projects and often default on completing them and handing over possession of assets to homebuyers. The hard-earned life-time savings of many homebuyers get locked up, and in many cases have been lost forever, due to this practice. For long, homebuyers had no recourse to the law in such cases. The IBC ordinance is an effort to tilt the balance in favour of homebuyers, who can now initiate bankruptcy proceedings against builders when projects fall into trouble. Homebuyers will have a say in the proceedings and can steer them towards resolution or liquidation. In the case of resolution, a way is found to complete the project and ensure that  homebuyers get possession of their assets. In the case of liquidation, homebuyers will get some level of precedence in payment from the sale of assets.  

The ordinance, however, leaves a loophole in precisely determining that level of precedence. It does not define homebuyers as either ‘secured’ or ‘unsecured’ creditors. This definition is critical in the “waterfall” mechanism which sets out the order of priority in which proceeds from the liquidation of the builder’s assets are to be distributed between homebuyers and lenders, such as banks. The government intends that it should be left to the homebuyer to argue whether she is a ‘secured’ or ‘unsecured’ creditor which, in turn, will be determined by the contract between her and the builder. This loophole can perhaps be closed when the government brings the amendment to parliament to convert the ordinance into law. Nonetheless, the ordinance is a great improvement over a situation in which the homebuyer had no choice but to suffer in silence.

Together with the Real Estate (Regulation and Development) Act, 2016, or RERA, the IBC ordinance should catalyse the process of formalisation of the real estate sector, hitherto unregulated, and thus the gradual phasing out of fly-by-night operators. None of this is going to happen overnight, however. It will take years. But for the real estate sector to be cleaned up and homebuying to become a predictable process, something else must happen apart from these laws: the nexus between builders, bureaucrats and politicians must be broken and the widespread use of cash, mostly black money, that moves seamless between them must be ended. That none of the government’s purported efforts to do so – including the much-touted demonetisation – have done more than scratch the surface in this regard is worrying.