Challenges and way forward for real estate insolvencies in India

Anchal Jindal, an insolvency expert, discusses the challenges of and way forward for real estate insolvencies in the country.

Real estate sector is one of the most globally recognized sectors comprising of housing, retail, hospitality, and commercial. The rapid growth in real estate sector is attributable to the growth in the corporate environment, interest for wider office space, urban and semi-urban accommodations. Real estate sector in India is expected to reach US$ 1 trillion in market size by 2030, up from $200 billion in 2021 and likely to contribute 13% to the country’s GDP by 2025. As per ICRA estimates, Indian firms are expected to raise more than Rs. 3.5 lakh crore ($ 48 billion) through infrastructure and real estate investment trusts in 2022, as compared with raised funds worth $ 29 billion to date.

Since the commencement of 21st century there has been a change in outlook in the real estate sector in India due to the presence of diverse real estate players, plethora of infrastructure schemes and projects, increased focus on various legal and regulatory compliances etc. Apart from this there has also been increased instances of deferred delivery of the projects, ambiguous builder buyer agreements, dubious fund application process thereby all prompting to distress among the homebuyers and consequently prolonged builder buyer battles stretching on for number of years thereby leading to great misery to the homebuyers and downfall in the real estate economy.

As per the RBI’s Report on Trend and Progress of Banking in India 2021-2022 the capital market, real estate, and commodities sector are categorized as sensitive sectors by RBI as assets of these sectors are prone to fluctuations in value. 

Presently, the real estate sector in India is in a chronic cycle of low growth coupled with the paucity of liquidity in the market. Report of Amitabh Kant’s Committee constituted by Ministry of Housing and Urban Affairs also states that the primary reason of stress in real estate sector in India is due to lack of financial viability, thereby leading to cost overruns and delayed project completion.

As per the IBBI Quarterly Newsletter, as on 30th September 2023, ~21% of insolvency process admitted in India under the Insolvency and Bankruptcy Code, 2016 (“IBC “) pertains to the real estate sector. The total number of CIRP in real estate sector has risen from an average of 208 each in FY22 to average of 313 in each quarter of FY23. However, FY24 however has commenced on a weak note with 238 cases admitted overall in the first quarter. Amidst the complications surrounding the insolvency resolution of real estate sector including but not limited to prolonged legal battles, lack of funding, land title disputes, regulatory challenges and consequent resolution delay, the share of real estate recoveries under IBC rose to ~19% as per latest Anarock’s Report on “Update on IBC in Indian Real Estate“.

Highlighted below are the various challenges being faced by various participants like homebuyers, resolution professional, investors and regulators while handling the Corporate Insolvency Resolution Process (CIRP) of a real estate developer:

1. Regulatory Issues: Incomplete/pending regulatory approvals and certifications from various authorities or delay in renewal of expired license may bring a project to a standstill or may delay the possession of property to the allottees which may lead to the initiation of the insolvency process against the real estate developer.
2. Ongoing multiple litigations: Plethora of litigations before various forums and insolvency resolution process of the real estate developers goes hand in hand which often leads to the delay in resolution process and erosion of the value of the assets of the real estate project thereby further leading to a smaller number of investors for such distressed assets.
3. Maintaining going concern: Since real estate projects are highly capital and labor intensive, to keep them as a going concern once the project is stalled after initiation of CIRP may turn out to be a challenging task for resolution professional. Keeping a real estate project ongoing requires continuous flow of funds in the form of working capital/interim finance which the resolution professional may find difficult to arrange once the CIRP has been initiated.
4. Large claimant base: In real estate insolvencies, resolution professional has to deal with large claimant base with majority of claims being received with delay. Other issues like title deed issue, claim of homebuyers with possession of home, varied class of homebuyers, treatment of orders passed by RERA/Consumer Forums etc. are other persisting issues related to the claim to be dealt by resolution professional during collation and verification of the claims.
5. Limited role of Authorized Representative: At present the role of Authorized Representative (“AR”) appointed for a class of homebuyers during CIRP is limited to seeking preliminary views from the homebuyers, representing their concerns before the Committee of Creditors, and circulating papers related to the meeting of the Committee of Creditors to the homebuyers. Also, only one AR is appointed for each class of homebuyers irrespective of the number of projects of the real estate developers that is undergoing insolvency resolution process. However, to ensure effective communication between AR and homebuyers of respective projects, it is imperative to have project wise AR.  
6. Limited scope for project wise resolution: Since real estate projects are highly capital and labor intensive in nature, investors are generally interested in acquiring a particular project rather than entire real estate company as a whole. At present, there are no provisions under IBC that allows an Insolvency Professional to invite investors to bid project wise and subsequently leading to entire project to land into the liquidation.
7. Lack of investor interest: The Real estate projects with title issues and other ongoing litigations usually does not attract the investors which might lead to real estate company slipping into the liquidation and prolonged continued misery for plethora of homebuyers to seek possession of their dream home.

Way forward to deal with above mentioned challenges and to achieve more resolutions in real estate sector are as follows:

1. Bar on multiplicity of proceedings: At present, aggrieved homebuyers often simultaneously approach RERA, NCLT as well as consumer forum for seeking relief against the same real estate developer for the same default. This may not necessarily be beneficial for the homebuyer, as it could lead to complications, delays, and turf wars between the various fora. Allowing homebuyers tapping of either of the forum for enforcing their rights with respect to the same default will prevent multiplicity of the proceedings and over burdening of the adjudicating forums and may promote effective and efficient resolution.
2. Reverse CIRP: Reverse CIRP is a win-win situation for both homebuyer as well as for project developer as it will not affect other projects of developers and liquidation of project will not affect the rights and interest of homebuyers which initially get impugned in many cases. It will allow resolution without the approval of the third-party resolution plan. The aim of Reverse CIRP is to get twin benefits: the first one is to save promoters from insolvency and the second one is to give possession to the allottees in the project. Since Reverse CIRP is still in experimenting phase and dealing with various other issues of homebuyers, therefore with the test of time as more real estate insolvencies goes in to reverse CIRP, its real success will be revealed.
3. Project Wise Insolvency: A real estate developer undertakes various construction project under the name of his real estate company. However, default in one project should not be construed as entire company being into default. Delay in completion or delivery of flats pertaining to one project should not affect the other projects of the real estate developer in order to safeguard the interests of real estate investors at large and also to ensure the preservation of the assets. Instead of restructuring the entire entity as a whole which in itself is a cumbersome and time-consuming process, project wise resolution should be exercised to get effective resolution.
4. Clarity on the status of homebuyers: IBC and rules and regulations made thereunder doesn’t throw light on the status of homebuyers being secured or unsecured creditor. This is crucial as it determines the priority of payments upon liquidation. In the absence of any statutory clarification on the same, the parties will have to fall back on the contract with the real estate developer to determine whether the homebuyer is a secured or an unsecured creditor. Necessary clarification in this regard needs to be provided by way of additional rules or further amendments to the IBC.
5. Single Window Clearance: At present there are number of licensing and certification requirements mandatory fora real estate developer before handing over the possession of flats to the respective homebuyers. Single window clearance for construction related approvals will help in expediting construction and avoiding delays and uncertainties. Streamlining of approvals on the basis of central and state regulations, as well as according to various departments and ministries would certainly help in consolidating and systemizing the real estate sector of India.
6. Robust Pre-Insolvency Framework: Pre-insolvency procedures should be made effective and the resolution of a company in the twilight zone should start at a much earlier stage. Pre-pack mechanism can be used in its true letter and spirit to overcome the challenges faced during the formal insolvency process and to safeguard the interest of homebuyers at large and at an early stage.
7. Alternate Dispute Resolution: Mediation is already being considered as one of the best way-out for resolving the disputes arising between builder and buyers, though there is always a power imbalance in case the allottee is the one bringing the petition and not the lender. Yet, mediation is considered as an effective resolution mechanism due to its nature of being time and cost effective.

(This article first appeared in a LinkedIn post)

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