Even as RERA lacks on several counts such as no uniformity and weak enforcement mechanisms, it still plays an important role in the regulatory framework. Both IBC and RERA are crucial legal frameworks, but they serve different purposes and have different mechanisms. RERA offers a platform for resolving day-to-day issues, ensuring transparency, and setting accountability norms for developers.
Over the years, the IBC has gained prominence in resolving cases involving stalled real estate projects and insolvency proceedings for developers. The time-bound resolution process under IBC has proven to be relatively more effective in cases where swift action is necessary to protect the interests of homebuyers.
RERA, on the other hand, primarily provides for compensation and imposes penalties on errant developers. However, this mechanism always does not ensure completion of a stalled project. In contrast, under IBC, the insolvency process can lead to the appointment of a resolution professional, asset restructuring, or even a change in management to ensure completion of the project. When there are a variety of solutions available along with a structured mechanism and advanced infrastructure digitally, one would prefer this route rather than the other, which still lags in terms of enforcement and strict action against non-compliant builders, and when there is still a need for improved digital infrastructure in some states for better accessibility and functionality of the RERA portals.
Challenges with RERA Vs success of IBC
RERA lacks uniformity, and it has led to differences in regulations, registration processes, fee structures, and timelines across states. Some states have diluted the provisions of RERA, allowing leniency that undermines the core objectives of the Act. In contrast, the IBC provides a single, uniform framework across India. It does not depend on state-level variations, making it a more predictable and reliable mechanism for all stakeholders. The provisions under IBC apply uniformly, ensuring that homebuyers across the country have a uniform legal recourse. It is much more comprehensive and advanced as it is seen from the data and observations.
Further improvements in IBC such as specific recognition of homebuyers as financial creditors allow them to be a part of the committee of creditors (COC) and the decision-making process through the authorised representatives who can guide them. These measures ensure that units in which possession have been given to be kept out of the liquidation process; introducing the whole concept of project-wise resolution and also allowing homebuyers to act as resolution applicants. All these aspects put together have over a period of time transformed the Code into a fairly homebuyer centric legislation with a certain soft corner towards them and, therefore, in cases of larger defaults, homebuyers prefer this route over the other options of consumer protection laws and RERA. Also, several landmark cases where IBC has been invoked by homebuyers such as the cases of Jaypee Infratech and Amrapali Group demonstrate the effectiveness of IBC in addressing large-scale real estate defaults.
Challenges under IBC
This does not mean the application of IBC in the sector is without its challenges. Involvement of multiple stakeholders, delays in the judicial process due to numerous applications, and the complexities of real estate transactions can sometimes lead to prolonged insolvency proceedings. Critics also argue that IBC should be a last resort, as it can lead to liquidation and loss of investment for homebuyers if a resolution plan is not feasible.
Data Speak
As per the official data, creditors have realised a staggering 161.71% of the liquidation value and 84.93% of their fair value. However, one can not discount the fact that the recoveries vis-à-vis the total claims made are about 32%, and that is primarily more so for the financial creditors and much lower for the operational creditors. While one way of looking at it is that numbers are available for public discussion and their scope of improvement, the hard fact remains that there has been significant value erosion of businesses from 2005-06 to 2014-15, the impact of which is seen as part of the cleanup under the IBC.
As per the latest IBBI data until June 2024, 1,400 real estate/construction companies were admitted into the Insolvency Resolution Process, in which 645 companies were rescued and 261 were liquidated, which shows rescued companies are nearly 2.5 times of those liquidated. Now the key word here is “rescued” (which doesn’t necessarily mean resolution plans but is a combination of withdrawals, resolutions, and closure of the process); thereby specifically plans being only a limited company and out of this number, and hence the success cannot be blown out of proportion as much as it has to be taken note of and cannot be ignored.
Wake up Call for RERA
The IBC’s ability to provide a unified, time-bound, and structured resolution process has offered a reliable recourse for creditors and homebuyers, making it a preferred option over RERA in many cases. However, this success also serves as a wake-up call for bringing improvement in RERA.
To remain relevant and effective, RERA must evolve to ensure more uniform implementation across states, strengthen enforcement mechanisms, and offer faster and more predictable outcomes for home-buyers. By bridging these gaps, RERA can complement the IBC, and both legislations can operate harmoniously and provide a more balanced regulatory ecosystem for the real estate sector.
RERA measures at times fail to help stalled projects
RERA primarily provides for compensation and imposes penalties on errant developers. However, this mechanism always does not ensure completion of a stalled project. In contrast, under IBC, insolvency process can lead to the appointment of a resolution professional, asset restructuring, or even a change in management to ensure completion of the project. RERA lacks uniformity, and it has led to differences in regulations, registration processes, fee structures, and timelines across states.
Author is a corporate lawyer who specialises in corporate disputes in New Delhi & Chennai