Half-Full: Post IBC, How Do We Encourage A Healthy Real Estate Participation?

In the words of Ravi Mittal, Chief of IBBI (Insolvency and Bankruptcy Board of India), IBC may have played a key role in revival of real estate in the country. Of the 1400 real-estate companies admitted for resolution 46% were rescued and 18% were liquidated. Resolution of realtors such as Jaypee Infratech has provided relief for over 10,000 buyers. There is a sliver of hope, but the ground-reality may be different.

Navigating the Market Realities

For the working class, buying property has been just wishful thinking. Real-estate prices have gone to astronomical heights given the price appreciation. According to the Indian Brand Equity Foundation (IBEF), in the quarter ended June, property prices in prime residential areas of Mumbai recorded the second highest rise among 44 cities globally. The city's growth rate for property prices stands at 11.5% in the Knight Frank's Prime Global Cities Index.

Skyrocketing prices have pushed aspiring buyers to invest in low-cost under-construction properties where they end up as victims to false promises. To such buyers, lack of paperwork, background check, and proof of transaction is a loss of their life's savings. RERA may have brought stringent controls upon such unscrupulous dealers. But the practice of an illegal nexus of a builder's lobby continues to erode the home-buyer's confidence.

Buyers even with projects such as slum redevelopment are likely to face such issues. What should worry India's real estate industry is the practice of piled up stock of unsold properties. Unsold properties as of June 2024 rose by 24% from 2019 – nearly half a million tenements did not find a buyer. Rising rates, lack of buyers, and long gestation of the sales process are issues that affect both buyers and sellers. This also affects the banking industry as burden of pending EMIs on home loans takes precedence.

LEGAL STRUCTURES WITH TEETH

RERA which imposed strict regulations saw more cases of fraud and insolvency. Thereafter, in 2017 itself, National Company Law Appellate Tribunal (NCLAT) started hearing the insolvency cases under the Insolvency and Bankruptcy Code (IBC). Despite the legal structure, scammed buyers are likely to face a loss despite parting with their life savings or a bank loan. Such buyers had the option of selling at a lower price or retain their house – both predicaments. In the case of the latter, a predicament in situations such as society not formed, conveyance not being paid, etc. This is when the need for IBC arose to fight such insolvency cases.

The availability of a legal structure has not simplified the ground reality for hapless buyers. It has also accentuated troubles for the Indian real-estate industry which has several opportunities to benefit from a rising economy. The severity has been such that the Economic Survey for 2024 indicated one in five insolvent companies from the real estate sector. According to the IBA (Indian Banks Association), the size is as gargantuan as 4.1 lakh units while bank defaults in seven years to 2023 stood at Rs 10.2 lakh crores.

While the defaults have been recovered, it implies the grave danger posed by unethical practices in Indian real estate sector. IBBI has rightly proposed a set of reforms to tackle real estate insolvency. IBBI's newest set of reforms discusses the merits of including land authority in CoC in such cases. IBBI also plans to streamline real estate insolvency processes by making the CoC meeting minutes for real estate projects accessible to all creditors through a secure online system.

But what is the logic of imprisoning a struggling debtor? More importantly how does just providing the CoC minutes provide value to the creditor? Does it help provide the home or the home value to its creditor? Although these are noteworthy steps but there is no clear respite for the creditor. Whether or not a builder is imprisoned or punished, the reluctance to pay value to the investors' or home-buyer's money jeopardizes the whole industry.

Arbitration and mediation provide distinct advantages over traditional legal processes in resolving disputes related to real estate projects, particularly when clear legal structures are absent or ineffective. These methods offer confidentiality, ensuring that sensitive financial and business information remains private, unlike court cases that are subject to public scrutiny. Additionally, they are typically faster and more efficient than litigation, which is crucial for real estate projects where delays can lead to significant financial and operational setbacks.

Arbitration and mediation remain highly flexible, since it allows parties to customize the process to suit their specific needs and the nature of their dispute. The involvement of arbitrators and mediators with specialized expertise in real estate law ensures a fair and well-informed resolution of complex cases. These processes are also cost-effective, reducing expenses associated with prolonged litigation. Indian real estate has reached several milestones – sales, value added, and economic benefits. But, for a fairer industry, it needs introspection and effective mediation techniques. Only improved confidence can help achieve the socio-economic milestone of every Indian having their own home.

Akshat Khetan is a corporate and legal advisor (Twitter @akshat_khetan). Views are personal.