Homebuyers strike big blow against builders, but may run into this wall now

The pressure homebuyers exerted on the government to force it to change IBC rules has led them to be tagged as financial creditors. Now they are officially on par with banks and financial institutions in terms of legal status. This is a big blow they struck at defaulting builders who have not provided them with flats nor refunded their money. As per rules, homebuyers were the last on the list of lenders. In effect, they would not have got their money back. That has changed now. On Wednesday, Centre approved the proposal to treat home buyers as financial creditors when a loan defaulter company is auctioned. The move will help homebuyers to quickly recover investments in bankrupt real-estate companies.
 
The Cabinet headed by Prime Minister Narendra Modi approved promulgation of an ordinance to amend the Insolvency and Bankruptcy Code 2016 (IBC) yesterday. Minister for Law and Justice Ravi Shankar Prasad, who briefed reporters in this regard, however, did not give details of the amendment proposed, but official sources said that home buyers will now be treated as financial creditors rather than operational creditors. It may be noted that financial creditors like banks get to recover their dues first when a company or its assets are auctioned.
 
Even though this massive good news has come their way, experts say there are many challenges still ahead and this may not exactly be the case where homebuyers will get their hard-earned money back instantly. In fact, they may run into an implementation wall when the time comes for them to get their money.
 
"It’s a big relief for home buyer as they will now have legal rights to claim their hard earned money back from builders in case the builder goes bankrupt. This is in line with Governments agenda to protect common tax payers wealth," said Taranpreet Singh, Partner, TASS Advisory. 
 
Further, he said, "It will have its own implementation challenges on how a buyer will initiate legal process of recovery, collaborating with other buyers and seeking legal assistance viz a viz bankers and other lenders who have great access to in-house legal services and will have mortgage on the assets of the bankrupt builders”.
 
Once these changes are incorporated in the IBC, homebuyers will be able to initiate a resolution process against builders to get their money back, just like financial creditors.
 
"This move will grant home buyers equal priority as banks and other institutional creditors while recovering dues from stressed or insolvent realty firms," said Ramesh Nair, chief executive officer and country head, JLL India.
 
CBRE South Asia executive director and head, valuation and advisory services Vamshi KK Nakirekanti revealed, "This in turn will boost investor confidence, and many consumers may be positively motivated to buy houses leading to highly awaited investments in the real estate sector." 
 
Meanwhile, NCR division of builders' body Credai stated that the move will instill a sense of confidence amongst buyers of under construction property, for continued flow of institutional and bank credit to the real estate sector.
 
"However, the system must uphold the superiority of a bank mortgage over any other claim otherwise banks may become hesitant in lending to this sector," Pankaj Bajaj, president, Credai NCR, added.
 
Anuj Puri, chairman, Anarock Property Consultants, said, "They need to know how exactly they will be represented in the creditors' committee in other words, whether the NCLT will appoint a resolution professional to represent their rights and interests."

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India Ratings, however, stated that this amendment could be credit negative for the lenders of real estate developers since the recovery proceeds will now have another layer of distribution, which was not factored in at the time of giving the loan to the builder.