The Reserve Bank of India (RBI) has fast-tracked the recovery of huge sums of unpaid loans owed to state-owned banks. It has sent in the second list of 28 corporate defaulters, who collectively owe over Rs 1 lakh crore, to face insolvency proceedings. While these steps are commendable, why isn’t the government moving with equal alacrity to protect lakhs of homebuyers against cheating builders who have swallowed up crores in advances?
The lack of legal protection for homebuyers has been brought to the fore by the recent Jaypee Infratech case. The construction company had launched as many as 27 housing projects in Greater Noida in the National Capital Region (NCR) and had taken advances from 32,000 homebuyers. The company has now collapsed under the weight of bad business practices, leaving buyers with no homes, nor money.
The Jaypee case
Meanwhile, IDBI Bank had moved against Jaypee before the National Company Law Tribunal (NCLT). Under the new Insolvency and Bankruptcy Code, the Tribunal is mandated to provide quick resolution to defaults by taking over the management of the company and then either selling off the assets or sanctioning a turnaround package where a refloat is possible. However, in the Jaypee Infratech case, NCLT made it clear that the main victims, the homebuyers, were not secured creditors like the banks, and could not seek protection under the Bankruptcy Code.
In appeal, the Supreme Court has provided some relief. The apex court has not only told Jaypee to deposit Rs 2,000 crore by October 27 but has directed the NCLT-appointed monitor, the Interim Resolution Professional, to come out with a swift plan that will protect the interests of homebuyers and other creditors. The court has also hinted that the bankruptcy law will need to be amended before the rights of the short-changed homebuyers can be protected.
Ajit Sinha, advocate of the homebuyers, pointed out that Jaypee had raised nearly Rs 25,000 crore from buyers compared to a mere Rs 526-crore claim being pressed by IDBI Bank. The buyers, therefore, deserved to be treated as ‘secured creditors’ on par with the banks.
The Jaypee Infra case is not an isolated instance. In the Noida area alone, there are 82 failed housing projects with homebuyers out on a limb. In Mumbai’s posh Napean Sea Road area, the Orbit Group has five or six stuck projects and the promoter, Pujit Aggarwal, is in jail on charges of cheating.
Hapless buyers in one project ‘Haven’, who have paid over Rs 250 crore in advances, are before the Bombay High Court. Their petition has tagged Axis Bank as a respondent, alleging the bank, in collusion with the builder, had lent monies to the project fully in the know that flat-buyers had a charge on the Orbit ‘Haven’ assets.
Legal options
How can the financial position of prospective homebuyers be secured when builders default? Currently, flat purchasers have no lien on the assets of the builder, and the only option is long-winded recovery proceedings. Some have argued that the industry specific Real Estate Regulation Act (RERA), more than the insolvency code, can be used to protect consumers.
Under RERA, 70 per cent of the proceeds from sales must be kept in an escrow account to be used solely for the project. This clause can be amended to ensure that the escrow account is firewalled against insolvency proceedings and allow homebuyers a direct lien on their funds. However, RERA’s implementation is slow and erratic in most states, leaving a question mark on this route.
The practical way out, therefore, is to amend Section 53 of the Insolvency and Bankruptcy Rules pertaining to ‘secured creditors’ to make homebuyers, not only on par, but ahead of institutional creditors. This will ensure that the financial claims of homebuyers are first in queue when the assets of defaulting builders go under the hammer.
Another route could be to translate the ‘advances’ taken from homebuyers into equity in the upcoming housing project, thus making them direct shareholders.
In recent days, the new minister of state for housing and urban affairs, Hardeep Singh Puri, said the government was looking at a ‘comprehensive amendment’ of the Insolvency Code.
Courts, more than the government, have been proactive in defending the interests of consumers. The judiciary has not baulked from taking criminal action against builders. Subrata Roy Sahara and
Unitech’s promoter Sanjay Chandra are some big names to have faced incarceration. But, jail terms will not bring back hard-earned money. For that, legislation to ensure financial security for consumers is necessary.
The author can be contacted at gurbir1@gmail.com