Proposed Changes in Insolvency Rules for Realty Projects

The proposed changes in rules to the insolvency resolution process for realty projects will help provide a few incremental improvements to the current regime by laying the groundwork for project-wise resolution of real estate companies, according to an expert.

Key Changes

The Insolvency and Bankruptcy Board of India (IBBI) has proposed mandatorily registering of projects under the Real Estate Regulatory Authority and keeping properties that are in the possession of homebuyers from the ambit of liquidation.

It has proposed five broad changes, including operating a separate bank account for each real estate project, executing registration/sublease deeds with approval of the Committee of Creditors (CoC) during the resolution process and allowing CoC to examine and invite separate plans for each project.

Incremental Improvements

Uday Khare, Partner at Cyril Amarchand Mangaldas, said the draft proposal makes a few incremental improvements to the current regime by laying the groundwork for project-wise resolution of real estate companies, and by smoothening the process for allottees to take possession during the course of the insolvency process.

Core Difficulty

However, he said it does not address the core difficulty faced in real estate insolvency resolution. Development authorities play a key role in three capacities in real estate insolvency resolution, as lessors, creditors, and regulators, and thus far have used this position to gain maximum advantages to themselves rather than aid the resolution process.

Despite being classified as operational creditors by the Supreme Court, they have not accepted this status, and have not been forthcoming in accepting resolution plans, providing consents for change of control, issuing occupancy and completion certificates etc. which are necessary for the effective resolution. Until this issue is addressed in an appropriate way, real progress will not be made on real estate resolutions, he noted.

Relief for Homebuyers

The proposed amendments to the rules are expected to provide relief for homebuyers whose investments are stuck in stalled real estate projects.

The proposed changes to the insolvency resolution process for realty projects are a step in the right direction. However, more needs to be done to address the core difficulties faced in real estate insolvency resolution. Only then will real progress be made on real estate resolutions.