Ashesh Shah, managing director at Trans–continental Capital Advisors, says the amendment will “offer some protection to homebuyers in case of bankruptcy by a developer, putting them in the same category as secured lenders and allowing them to share pro rata in recovery with banks”.
Also, consumers’ voice and rights in the real estate market would strengthen. Stressed realty developers can be taken to any of the National Company Law Tribunal (NCLT) benches for insolvency proceedings by homebuyers.
Ajay Jain, joint managing director at Sun Capital Advisory Services, says: “This amendment has come to largely safeguard homebuyers who are taken for a ride by developers. Usually, the customer would always suffer whenever the lender and developer would settle loan dues.”
Adding: “Now, homebuyers can take necessary legal action against developers who either delay the delivery of a flat or deliver the flat on time but are inconsistent in terms of the qualitative aspects.”
A developer is bound to deliver according to the specifications out in the agreement with the buyer(s). If the house in question does not meet these specifications, the buyer has a ground to file insolvency proceedings against the developer.
However, residential real estate developers will feel the pinch when it comes to funding. The head of risk management at a mid-size private bank, who wished to not be named, told Business Standard: “The first fallout will be on availability of money. Funds will become scarcer for a while, while another impact will be a rise in interest rates. Those developers with a standing for quality will become prime customers for lenders. For others, easy access to funds will become a thing of the past.”
Says Shah of TransContinental: “Banks would achieve lower recoveries, equivalent to the amount given to homebuyers. So, for any new loans, banks would have to recalculate the collateral and securities they would require from developers, factoring in the additional ‘debt’ of homebuyers.” Therefore, the amount of bank funding available to developers could get constrained or might “require higher returns for the increased leverage and risk”, he said.
The banker cited earlier said, “Lenders will also need to change their policy for collateral and securities. Earlier, there was an exclusive charge, which might now have to be shared. So, lenders will look for assets where they can seek exclusive charge.” Most of the recommendations in the insolvency law committee’s report, published last month, are expected to be introduced into the IBC through the ordinance.