Due to the twin effect of demonetisation and the implementation of Goods and Service Tax (GST) in late 2016, and the middle of 2017, respectively, the real estate sector witnessed a tsunami effect. Here is an overview of the real estate sector in 2019.
Prior to the introduction of the Real Estate (Regulation and Development) Act, 2016, the state of affairs prevailing over the real estate sector, including prolonged delivery of units, was considered normal in India. The homebuyers had no alternative but to take it in their stride. In this backdrop, RERA was enacted to curb the menace, thereby bringing about the much-required efficiency and transparency. It established a robust mechanism to enable a homebuyer to have access to all information, including the date of possession of their respective homes. Around the same time, Insolvency and Bankruptcy Code, 2016 (IBC) was enacted for the revival and rehabilitation of the companies, including the real estate companies. This was due to the increase in the Non-Performing Assets of the banks and the slow recovery from the assistance of the tribunals.
Coming to 2019, the Indian real estate sector witnessed a slew of changes and challenges in this year.
The real estate sector in 2019
The year witnessed several litigations against prominent companies in the National Capital Region (NCR). Thousands of homebuyers who had earlier invested in the ongoing projects of reputed companies across NCR approached the Supreme Court for relief against the defaulters. The promoters of these companies had reportedly diverted the funds of the homebuyers by fraudulent means.
Much to the relief of the homebuyers, the Supreme Court of India reprimanded the banks for the manner in which the loans were disbursed to such real estate developers and the mortgage created on the immovable properties, without compliance of the conditions applicable for mortgaging immovable properties.
The Apex Court in these cases amongst other issues, clarified the position of a homebuyer being akin to a financial creditor under the IBC. It categorically and explicitly brought the homebuyers at par with the banks and financial institutions under the definition of 'Financial Creditor'. The decision came as a much-needed respite for the buyers in this segment.
However, the decision was challenged on various grounds. Whilst upholding the validity of the 2018 amendment and to balance the interests and address the concerns of the developers, the Supreme Court laid down various factors to be considered when an application is filed by a homebuyer before NCLT under IBC. This was necessary to rule out the possibility of a genuine real estate developer being harassed by a homebuyer. The homebuyer was mandated to prove his bonafide about being a genuine homebuyer who is seeking a refund of his hard-earned money on account of the default on the part of the developer. The buyer had to prove that he is not a speculative investor who has approached the tribunal as a coercive measure to get his money refunded.
Real estate sector legal concerns in 2019
A single homebuyer bringing the matters under the IBC regime despite there being various other avenues available to redress their genuine concerns still remained a bone of contention. In the scheme of things, the real estate industry mooted the concept of a threshold of homebuyers coming under the fold of IBC to initiate an action. Hence, under the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 (Second Amendment Bill), the legislature is inter-alia considering to introduce a threshold limit for the homebuyers so that a single homebuyer's application is per se not maintainable. It has been proposed to have a minimum of one hundred (100) homebuyers or ten (10) per cent of the total homebuyers, in case they need to approach NCLT for filing an insolvency application.
There were several other concerns that plagued the industry at this time-one of the major ones being non-maintenance of accounts by the Banks as per RBI norms. A glaring unfortunate accident was witnessed in 2019, wherein a prominent bank failed to maintain its accounts as per the prescribed norms. This resulted in the diversion of funds to cater to the whims and fancies of the construction company and its promoters. It was a double whammy that the company did not deploy the loans availed from the Bank for the purposes of the undertaking and completing the projects. Instead, it used the funds for the personal use of the Promoters by various dubious means.
While the Government is doing its bit to overcome the challenges present in the sector, there is still a long way to go. The homebuyers are, therefore, advised to be diligent and vigilant before investing in a property.
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