India File

A tale of three developers — will the law catch up?

Aarati Krishnan | Updated on August 13, 2019 Published on August 13, 2019

The travails faced by nearly 1 lakh home-buyers in the National Capital Region after signing up for housing projects with three leading developers — Unitech, Amrapali and Jaypee — exemplify all that was wrong with India’s real estate sector, before the Courts and legislature sought to reform it in the last three years.

Taking a diversion

Take the case of the Amrapali group, on which the Supreme Court ordered an Enforcement Directorate investigation in a judgement last week. Over 42,000 hopeful buyers had booked flats in Amrapali’s projects in Noida and Greater Noida between 2010 and 2014, based on expected completion time of 36 months. But seven to nine years on, after taking on home loans and coughing up 50 to 100 per cent of their dues, these projects are nowhere near completion.

After approaching the consumer courts in 2017 and warding off action by lenders in the NCLT, buyers petitioned the Supreme Court of India for some justice. The SC, after a forensic audit of the books, found evidence of rampant diversion of funds amounting to over ₹3,000 crore towards pet ventures and personal expenses of the promoters.

One-sided agreements, which gave the developer lien over the property even after full payment by buyers, helped the developer raise bank loans. In its judgement, the SC has come down hard on the developer by cancelling its land leases, handing them over to a Court Receiver and ordering the public sector NBCC to take over the completion of pending projects. It has also passed strictures on banks and the Noida authorities, preventing them from attaching any of the property funded by home-buyers, given their failure to fulfil their basic fiduciary duties.

The ordeal of 16,000 flat-buyers in the 74 pan-India projects developed by Unitech has lasted even longer. Buyers in Unitech’s projects have waited between 7 and 12 years after paying up, as the promoters accumulated a mountain of debt through unrelated diversification, got embroiled in the 2G scam and were eventually hauled to the NCLT by lenders. After filing cases with the consumer court and Delhi police, flat-buyers, in this case also knocked at the SC’s doors for remedy, which has again roped in the NBCC as the white knight.

In both these cases, though the SC has ruled in favour of home-buyers, loose ends remain. Given that the NBCC will not deploy its own funds in rescue efforts, it will need to scrounge up enough money from home-buyers’ dues and residual assets to complete these mammoth projects, leading to an uncertain time line for completion.

Tug of war

Unlike the Amrapali or Unitech case, the battle of 30,000 home-buyers in Jaypee Infratech’s projects in Noida is being fought mainly in the insolvency courts. With lenders dragging Jaypee to NCLT for non-payment of dues, first there were prolonged parleys on whether home-buyers deserved a seat on the Committee of Creditors that would decide on the resolution process. The matter was settled by the Centre amending Section 7 of the Indian Bankruptcy Code to give the allottees of real estate firms the status of deemed financial creditor in 2018. With this change, home-buyers were vested with powers to trigger insolvency proceedings against realtors and seek representation in the Committee of Creditors. Then this amendment was challenged by the developers’ lobby, and finally upheld by the Supreme Court this week.

Meanwhile, lenders and home-buyers are engaged in a tug-of-war on the resolution. While lenders are keen on liquidating the firm to maximise their realisations, home-buyers are in favour of sale to bidders who can complete their pending projects.

Broken confidence

The tale of these three developers pretty much sums up why India’s real estate sector, saddled with huge unsold inventory, is now struggling to woo new buyers. For decades, the industry has meted out cavalier treatment to its consumers, collecting hefty advances for projects that reside only on paper, rotating customers’ funds for working capital requirements, diverting money from one project to another with impunity and even siphoning it off to private coffers. But with these skeletons now tumbling out of the closet, this flawed business model has collapsed.

The scale of this problem is evident from a report by Anarock Property Consultants, which estimates that 220 housing projects across top seven cities in India have 1.74 lakh homes stuck in various stages of construction. Of these, a whopping two-thirds or 1.1 lakh homes have already been sold to buyers, leaving them out in the cold.

There appears little choice for home-buyers in these legacy projects but to wait it out. But for future home-buyers in India, the RERA or Real Estate Regulation and Development Act enacted by the Centre in 2016 promises to make life much easier. The RERA plugs precisely the flaws in the realty business model that have been revealed by the Amrapali, Unitech and Jaypee cases.

RERA reboot

The RERA requires developers to register every new project with a local RERA authority, adhere to standard contract terms, sequester buyer funds in an escrow account for use in the same project and cough up heavy penalties for delays in completion. It also empowers home-buyers to file complaints with the adjudicating authority in their respective States against developers, for violation of rules or contract terms. Some States have also set up Conciliation Forums to resolve buyer complaints ahead of approaching the Courts. In effect, RERA seeks to add another more accessible redress forum for home-buyers, in addition to existing avenues such as consumer courts, NCLT and the judiciary.

While the RERA is a sound law that rewrites the uneven equation between Indian home-buyers and developers, its success in safeguarding buyer interests will depend on its adoption and strict enforcement by individual States. On this score, it is noteworthy that in the first couple of years after the Central RERA was enacted, most States were still dragging their feet.

In the past year, though, Maharashtra has emerged a forerunner in using RERA to resolve home-buyer disputes. The Centre recently informed the SC that 30 States and Union Territories have now implemented the RERA with 42,276 housing projects registered under it. Presently, Maharashtra alone accounts for nearly half of the RERA registered projects. One hopes that the other States, at least in the interests of boosting real estate activity in their local economies, will take some cues from it.

Published on August 13, 2019
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