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Significance of regulation in real estate sector post RERA and IBC amendments

September 05, 2018 | EXPERT ZONE

The real estate sector is one of the most important sectors for the economy as it is a second largest employer in India after agriculture and is slated to grow by 30% in next few years. The real estate sector comprises four sub sectors – housing, retail, hospitality, and commercial. As per the available data The Indian real estate market is expected to touch US$ 180 billion by 2020. Housing sector is expected to contribute around 11 per cent to India’s GDP by 2020. Retail, hospitality and commercial real estate are also growing significantly owing to push to create much-needed infrastructure.

The principal players in the sector are developers and buyers. For a long time there was a perception amongst buyers and predominantly amongst home buyers that real estate transactions including laws, regulations and agreements were lopsided and heavily in favour of the developers. In addition the legal process in case of any breach or dispute favoured developers mostly owing to delays in courts leading to loss of time and increased costs for the buyers. Increased defaults by the developers particularly in relation to housing mainly due to lack or regulation and enforcement mechanisms led the government to enact The Real Estate (Regulation and Development) Act, 2016 (under which Real Estate Regulatory Authority (“RERA”) was created with the aim to create a more equitable and fair transaction market between the developers and the buyers. It was thought that increased transparency would lead to increase in investments and overall growth of the sector.

The Act mandates the states to create their own Real Estate Authorities and Appellate Authorities for laying down of state specific real estate regulations and quick disposal of complaints in relation to real estate sector. Under RERA regime the projects are required to be registered with state RERA and all information about the project and the developer is available on the website of RERA. This ensures transparency so that the consumers can make informed decisions. Other significant provisions relate to deposit of funds collected in an escrow account and non-diversion of funds collected from buyers of one project to another project. The law also envisages are dispute settlement mechanism to ensure quick resolution of disputes to the benefit of all stakeholders.

In addition to RERA another major legislative intervention with respect to the Real Estate Sector has been inclusion of Home Buyers as a class of the financial creditors in any action under the Bankruptcy and Insolvency Code, 2016 (the “Insolvency Code”). In the context of insolvency proceedings of a company involved in real estate development, the amendment results in  homebuyers being treated as financial creditors at par with the banks and financial institutions.

Due to the amendment, homebuyers can initiate insolvency proceedings against real estate developers and would have representation on the committee of creditors which decides on the resolution plan for the defaulting company and would be treated as financial creditors in case of liquidation of the real estate developer.

It will be interesting to watch the developments in Jaypee insolvency process wherein under the directions of the Supreme Court the homebuyers will be part of the Committee of Creditors which will oversee the insolvency process. In addition recently an insolvency petition has been filed by the New Delhi based consulting firm SGM Webtech Pvt. Ltd in the National Company Law Tribunal seeking to initiate insolvency proceedings against Boulevard Projects Pvt. Ltd, a Noida-based real estate developer.

Post RERA and the changes in the Insolvency Code, the regulation of the Real Estate Sector has increased manifold. RERA has increased transparency in the real estate sector and also ensured quick resolution of disputes. The fact that the buyers can proceed under the Insolvency Code is a huge step forward for safeguarding the interests of the buyers as now they can initiate the insolvency resolution process against the developer company where the end result could be the change of the ownership of the developer company to the highest bidder or liquidation of the company in case no feasible buyer comes forward.  This means the promoters of the real estate company losing control of the entity created by them.

The regulatory changes have brought in much needed investor confidence in the real estate sector which would lead to increased investments. Thisincreased regulation should be welcomed by the real estate sectoras it is an opportunity for the developers to change the public perception towards the sector. That said the regulatory landscape is still in infancy and it will be interesting to see how the institutions evolve over a period of time.

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