The Indian government is contemplating abandoning its proposed special resolution framework for the real estate sector as part of the amendments to the Insolvency and Bankruptcy Code (IBC), according to multiple sources cited by ET RealEstate. After careful consideration, the government believes that such sector-specific mechanisms within the IBC could dilute the objectives of the bankruptcy law and prove to be counterproductive. The potential move comes as the government plans to amend the IBC after the general election in April-May.
Protected Firms from Bankruptcy Proceedings
The special resolution framework for real estate, which the government sought stakeholders’ views on in January 2023, aimed to grant greater protection to defaulting firms from bankruptcy proceedings. Under this framework, only insolvent projects would be subjected to the IBC provisions, allowing the debtor developer to maintain control of the firm during the insolvency resolution. The plan was backed by the insolvency regulator and was expected to expedite resolution of stress in the real estate sector.
Fear of Abuse and Compounded Woes
However, there are concerns that unscrupulous promoters and developers may exploit such relief to abandon half-finished housing projects after taking profits and shift their focus to more profitable ventures. Additionally, there is a risk that developers may divert funds from specific projects, further worsening the situation for home buyers instead of improving it.
No Special Framework Foreseen
Following deliberations and consultations, the government has decided against introducing a special framework for real estate under the IBC. The decision stems from the belief that each sector may have its own unique challenges, but this does not necessarily mean that a special IBC framework is warranted.
Current Provisions for Real Estate
National Company Law Tribunal (NCLT), as per the existing IBC, enables not only a certain number of homebuyers but also other creditors to bring the entire realty firm under insolvency, including a specific project. Additionally, defaulting promoters may lose control of their companies once insolvency proceedings are admitted by the NCLT.
Insolvency and Real Estate Sector
Real estate accounted for 21% of all insolvency cases admitted until December 2023, making it the highest after the manufacturing sector, according to data from the Insolvency and Bankruptcy Board of India (IBBI). However, only 14% of the resolved insolvency cases were related to the real estate sector. While the government has determined that a dedicated special resolution framework for real estate may not be feasible within the IBC, it remains open to implementing flexibilities and regulations from time to time to facilitate easier resolution in the sector. The decision aims to strike a balance between protecting the interests of defaulting firms and ensuring a fair and efficient bankruptcy process.
