Financial irregularities and Money Laundering have been symptomatic of the Real Estate industry in the past few years. This has resulted in bankruptcy of several real estate companies such as Jaypee, Amrapali, Unitech, Supertech, 3C Lotus, Marg Properties and others. Prior to the bankruptcy, the projects of these companies were already substantially delayed, some by more than 5 years. With bankruptcy, the homebuyers have little hope of receiving the apartments since all the funds paid by the homebuyers have been siphoned off by corrupt builders and no party (neither the govt., banks, other builders) is interested in completing these projects. There is no genuine source of information available for how many homebuyers are impacted by such insolvencies but anywhere between 300,000 – 500,000 buyers is the most conservative guess.

 

Why did the situation come to this?

1.      Lack of legal recourse for homebuyers – Post insolvency of builders, the homebuyers have no legal recourse to recover the amounts that they have paid to the builders. While legally they are part of the Credit Committee (as per IBC), the legislation has been ineffective in resolving homebuyer issues as borne out by Jaypee, Amrapali, Supertech and many more cases. All these cases remain unresolved with the homebuyers neither receiving their funds back nor getting their houses

 

2.      Lack of intent among the state governments – In a number of cases, homebuyers have approached RERA and received refund orders against the builders from HRERA and UPRERA. However all of these orders remain ineffective as the state governments have no intention of enforcing these orders. Mere legislation does not solve problems if it is not followed up with administrative action on the ground. RERA ACT is a excellent example of the disconnect between the intentions of Central and State governments and the priority that homebuyer interests carry for state governments

 

3.      Ineffective Legislation – There are several judicial bodies including RERA, NCDRC and civil courts but current legislations are all ineffective once builder goes into insolvency. So while insolvency as a construct works for going-concerns (companies) as they have the balance sheet strength to absorb the losses. Individual homebuyers invest a significant portion of their lifetime savings in buying a property, hence an IBC construct that enables them to get a residual value results in paralyzing and disabling a home for the foreseeable future. Moreover, IBC as a construct have not resulted in swift resolutions of any cases, other than making homebuyers party to the Credit Committee for resolving insolvency of builders.

 

4.      Alternate approaches such as Reverse Insolvency – Supreme Court and NCLT have tried alternate resolutions in the past such as Reverse Insolvency, takeover of projects by NBCC etc. However all of these resolutions suffer from lack of funding to complete the projects and neither homebuyers (suffering under the double whammy of EMI and Rents) nor Banks (looking at the bad reputation of projects) find it unviable to invest in the projects for completion

 

It is an extremely complex situation that is brought to bear by lack of political will for a resolution and intent of the administration to execute orders of RERA / NCDRC etc. The homebuyers, unlike other commercial entities, cannot wait infinitely for a resolution. Homebuyers are not a going concern (like companies) and they need to take care of lifestage events such as children’s education, children’s marriage, retirement, job loss, health issues and many others. All of these events require money and having to indefinitely pay EMI for a property they will never get is demoralizing and financial draining. This situation cannot be allowed to perpetuate and the governments and courts need to find a time bound solution to these cases.

 

Our Proposed Solution

However we have not seen any effort on the part of Ministry of Housing and Urban Affairs, Ministry of Law or RBI to get anything concrete done in this direction. In light of the inaction of entities in getting the homebuyer issues, we propose the following solution:

1.      If any builder / project that is declared insolvent, the homebuyers should have the right to forego their property

2.      Once the homebuyer foregoes the property, it is recognized a Capital Loss by the Income Tax Department and allowed to be offset against any future income of the homebuyer. It may not be enough to consider it as a Real Estate Capital Loss to be offset any future Real Estate Capital Gains. In their lifetime, most of the Indian middle class purchase one or two properties. They do not run this as a source of income, so it may not be possible for them to offset it against future Real Estate gains

3.      The homebuyer becomes eligible to get income tax rebate for all future years for an amount equivalent to what they have paid to builder (incl Bank Loan) for all future years

4.      The homebuyer loses right to the property and the Credit Committee can sell the property to another builder / Project Manager to complete the home and sell it

The benefits of the above proposal is that:

1.      Enables Credit Committee to complete the project and make it economically viable for the new buyer

2.      Enables homebuyers to get a swift resolution and allows them to but another property with the same amount

3.      Allows bank to recoup their bank loans. There is a big NPA overhang on banks as sooner or later homebuyers will buckle under the weight of financial burden and be unable to pay EMIs and Rents

4.      Income Tax department will see a miniscule shortfall in tax collection as compared to the large pool that they currently have

I would request all competent and relevant authorities to consider this proposal and bring this to fruition at the earliest to rid impacted homebuyers of the curse of court visits, EMIs, legal notices, protests and administrative disdain.