by Abhishek Sharma
Partner, Cyril Amarchand Mangaldas
The real estate sector is facing challenging times and is under tremendous pressure despite the measures taken by the Government so far. Enactment of Real Estate (Regulation and Development) Act, 2016 (RERA), reducing rate of Goods and Services Tax (GST) from 12% to 5% (without ITC benefit), providing various tax incentives for affordable housing, modifying the Insolvency and Bankruptcy Code, 2016 (IBC) to classify flat purchasers as “financial creditors” have certainly generated some interest in the consumers. However, the sector per se is under immense stress due to high unsold inventory and drying up of refinancing options for developers due to the recent liquidity crunch faced by NBFC’s. In order to improve market sentiment, the Government needs to take a few immediate actions.
First and foremost, the multiplicity of legal proceedings needs to be avoided. The Government needs to deliberate if it would be prudent to vest exclusive jurisdiction for all disputes between developer and purchaser with RERA Authority. Presently, flat purchasers have the option of approaching consumer forum and National Company Law Tribunal (NCLT).
Providing ITC benefits to developers while charging a reduced GST rate of 5% for projects would provide further relief to the sector.
In order to boost the confidence of lenders, necessary amendments ought to be made to RERA. Specifically recognizing their rights in cases of revocation of registration of project and clarifying that lenders would not qualify as promoter upon enforcement of their mortgage over the project, would be welcomed by the lenders. Clarification would also be helpful in expressly permitting withdrawal of outstanding interest by the lenders; from 70% separate account on which doubt has been cast due to an order of a RERA Authority. To assist the investor community clarification could be issued that change in shareholding of the developer company would not amount to transfer of rights and liabilities of the developer under Section 15 of RERA. As such a transfer requires prior approval of the flat purchasers and RERA Authority. Such clarifications will also help the developer to tap into investments through private equity players, especially when there is a scarcity of refinancing through NBFC’s. While the RERA Authority in Maharashtra has already taken certain positive steps in relation to the above to aid the lender and investor community, similar amends needs to be taken in other jurisdictions as well.
The State Governments should expeditiously set up a single window clearance mechanism to fasten the process of grant of development approvals. RERA should consider granting extensions to genuine developers where they are sufficiently able to demonstrate that the delay is due to delay in grant of approval, without any lapse on their part. Currently, these extensions are being refused by various RERA Authorities, causing further financial stress to the developer. As in such situations the developers need to refund monies to the aggrieved flat purchaser while struggling to service their debt.
The Government needs to harmonize the working of RERA and IBC so that flat purchasers do not misuse the insolvency route against the financially sound developer for seeking timely completion of projects, delayed due to reasons beyond the control of the developer. This adversely impacts the interests of other stakeholders, including genuine consumers. Such issues can be appropriately addressed under RERA which itself provides sufficient remedies to flat purchasers. The Act also confers sufficient power on the RERA Authority to issue necessary directions against the developers. These include awarding delayed interest, taking over of the project by third-party agencies or association of flat purchasers. The validity of the IBC amendment bringing flat purchasers within the ambit of financial creditors has been challenged by various developers before the Supreme Court of India. The outcome of such proceedings would have a substantial bearing on the industry.
Therefore, quick action on the abovementioned issues will go a long way in helping the ailing real estate industry and inspiring confidence among its stakeholders.