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The government of India is planning to amend the insolvency law in order to facilitate "customized resolutions" for bankrupt residential real estate projects, with the aim of expediting the delivery of flats to homebuyers in distressed housing projects. Currently, the Insolvency and Bankruptcy Code (IBC) applies a rigid framework to the entire real estate sector, but the proposed changes would allow for resolution processes tailored to the specific nature of each project.
The objective of these amendments is not only to accelerate the delivery of homes to buyers but also to prevent the erosion of the value of stressed housing projects. To achieve this, the government is considering introducing innovative and customized resolution provisions for the real estate sector, in addition to the existing ones. These changes are being discussed extensively with stakeholders to address the complex and sensitive issues specific to the real estate industry.
However, it is important to note that any customized resolutions must still adhere to the fundamental structure of the IBC. Furthermore, these resolution formats will likely require clearance from the National Company Law Tribunal (NCLT), ensuring compliance with the legal procedures.
Experts argue that the real estate sector is unique, as homebuyers are also considered financial creditors under the IBC. Consequently, they believe that a distinct resolution process is necessary for this sector.
However, it is crucial to address procedural issues associated with customized resolutions. These issues include defining the roles of the resolution professional and the management, determining the calculation of resolution costs, and preventing the intermingling of funds and operations across different projects. Clear guidelines and regulations must be established to ensure transparency and accountability.
The government has previously mentioned its intention to take a multi-pronged approach to resolve stress in housing projects and expedite the delivery of homes to buyers. In addition to the IBC, other measures being considered include utilizing the Real Estate Regulatory Authority and the SWAMIH (Special Window for Affordable and Mid-income Housing) Fund for last-mile financing. Introducing an innovative IBC mechanism specifically designed for the real estate sector would complement these efforts.
In January, the Ministry of Corporate Affairs sought suggestions on a specialized regime for the real estate sector. It proposed that the insolvency process should be limited to insolvent projects rather than being applied to an entire company, including solvent projects.
While a specialized framework for the real estate sector is necessary, certain safeguards must be in place to prevent misuse by stakeholders. Striking the right balance between flexibility and accountability is crucial to ensuring the effectiveness of the proposed amendments to the insolvency law in the context of the real estate industry.
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