In 2008, when the global financial crisis hit India, the government granted massive concessions to the realty sector to bail it out. Unfortunately, instead of giving limited support and forcing them to clean up their act, most bankers colluded with shady builders, allowing them to expand recklessly. In most cities, prices raced past what the market could afford and it remains that way. Through all this, builders continued to hold up the prices of unsold property. With banks on the verge of going bust themselves, the music has stopped; developers are bankrupt and saddled with incomplete projects.
Caught in the crossfire are lakhs of home-buyers, who invested their lifetime savings, or took huge loans to book their dream house in such mega projects. The government is doing its best to kick-start the market, but it is now clear that, unless it sorts out the existing mess, there is unlikely to be a new beginning.
Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC), and one of the most respected names in corporate India, says, the government’s ‘affordable housing’ plan announced in the 2017 Union Budget has some incredible incentives for both, real estate industry and home-buyers. Along with the consumer protection offered by the Real Estate Regulatory Act (RERA), it could have paved the way for a clean-up and revival of demand. Mr Parekh says that a decent-sized 2-bedroom apartment, which also fits the definition of ‘affordable’ homes, would fulfil the dreams of a growing middle-class. Unfortunately, barring a few large and well-run corporate groups, the industry is in an awful financial mess.
Things came to a head after the government pushed banks and lenders to step up loan recovery efforts through the Insolvency and Bankruptcy Code (IBC). IDBI Bank set the ball rolling when it approached the Allahabad bench of the National Company Law Tribunal (NCLT) to file IBC proceedings against Jaypee Infratech for a Rs526-crore default. This subsumes any other existing litigation against the company. IBC proceedings against the company would have left the home-buyers of Jaypee’s projects without any recourse. They quickly came together to protect their interest through litigation. The NCLT bench ordered insolvency proceedings. The government chipped in to help by amending the Insolvency Resolution Process for Corporate Persons Regulations, 2016, to allow home-buyers to file their claim as creditors.
However, treating home-buyers on par with other creditors could also mean taking a similar haircut on their investment. The home-buyers approached the Supreme Court for a stay on the insolvency proceedings ordered by the NCLT’s Allahabad bench. Although the Court initially granted a stay and had posted the hearing for 10th October, it has, since, agreed to hear IDBI Bank’s plea to modify its order on 11th September. This has put home-buyers, lenders, the realty industry and the government on edge. IDBI Bank has pointed out that the apex court’s stay order put the promoters of Jaypee, who are squarely responsible for the colossal mess, back in charge of the company. Home-buyers are concerned that lenders would think nothing of compromising their interest again.
An opinion piece in The Financial Express (dated 6th September) alleges that home-buyers’ move to protect their flats could derail the insolvency process itself. The claim that Jaypee’s home-buyers could derail the IBC seems rather silly. This peculiar problem pertains only to the realty industry, where dubious developers, on the verge of bankruptcy, have also short-changed lakhs of home-buyers—many of whom have paid over 90% of the cost of their home and have not received possession of their flats. One solution suggested by bankers is that home-buyers, as creditors, may also “need to take big haircuts if need be.” Consider the enormity of what this would mean.
• Home-buyers put their faith in government processes and in bankers and mortgage financiers having honestly discharged their responsibility of appraising the project, ensuring regulatory clearances and monitoring the use of funds. It seems preposterous that they should now be asked to take a haircut on par with lenders who are really responsible for the bad loan problem.
• If IDBI Bank and other lenders agree to give up anywhere between 50% to 70% of what they are owed (yes, initial proceedings before the NCLT indicate that the haircut will be as steep as that), a home-buyer will be told that the Rs1 crore, he has already paid the builder for her home is now worth Rs30 lakh to Rs50 lakh.
• In effect, the least empowered person in the chain will be made to pay for the collusion of banks for lending recklessly and failing to monitor or recovery of funds. Builders also sank into a deeper mess by refusing to clear unsold inventory by cutting property prices which bankers knew and condoned but over which home-buyers had no control.
• Many are continuing to pay EMIs (equated monthly instalments). Defaulting on a home loan is, in fact, a financial hara-kiri, because a default in one’s credit record makes one ineligible to get a credit card, personal loans or even open trading account.
• Lakhs of home-buyers all over the country are trapped in this absurd situation and an order on Jaypee Infratech will affect their interests as well. If home-buyers are hurt, there will be political repercussions too. Until now, political parties have ignored concerns of the middle-class, unless there is a huge public uproar. Those who have followed our writings would know how callously governments have ignored the plight of those who are struggling to get companies to redeem corporate fixed deposits. But the emotions and aspirations attached to owning a home are rather different.
• Home-buyers will stop buying under-construction projects and not only other realty projects, but the government’s ambitious and politically important ‘affordable homes’ plan will not take off.
In my view, this mess needs a political solution. India is notorious for having super wealthy promoters heading sick companies. A government, which has promised to go after black money, has to find a way to deliver on this promise. The Jaypee issue, which involves around 30,000 persons in 27 projects is both, complicated and political, and home-buyers are mere scapegoats. Jaypee and other projects at Noida received exceptional concessions from the Mayawati government including land at a throwaway price. It obviously had a quid pro quo.
Over the past few years, the Noida Authority has been working to sort out issues involving Jaypee as well as the Amrapali group which has 40,000 buyers and is in a similar financial mess. Amrapali investors, too, have joined hands to protect their investment. According to reports, some investors have paid as much as 90% or more for their apartments while others were due to receive their completed flats only by 2021. Since the numbers are large and the entire industry will be affected by the reputation damage, industry organisations are also trying to work out a deal with the government for another developer to step in and complete the unfinished projects. As always, they want more concessions. And all this pertains only to Noida. There are similar issues with very large and high-profile developers in Mumbai and Pune as well.
According to one estimate, a massive Rs10 lakh crore is stuck in incomplete realty projects whose developers are at a financial standstill. Finding a solution that neither lets off the corrupt builder-banker-neta-babu nexus, nor inflicts damage on buyers is admittedly a challenge. One of the ways to do this is for the government to put pressure on Jaypee promoters personally and real estate biggies to step in and find a solution or ban sales of under-construction projects. Indeed, as we go to the press, we hear that the government-owned National Building Construction Company will be asked to step in and complete the Jaypee projects.
in housing projects we are investors in F.Ds with J.P.infratech.God only should
save us