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Impact of Insolvency and Bankruptcy Code 2016 on Indian real estate

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There is an air of uncertainty regarding the immediate effect of the Insolvency and Bankruptcy Code 2016 on the Indian real estate market. While some believe it will ease the business environment and result in liquidity, others feel it might increase the bankruptcy petitions.

On 11 May 2016, the Rajya Sabha passed the Insolvency and Bankruptcy Code 2016. The bill now awaits the approval of the President of India to become an act. The bill was introduced to deal with corporate and individual insolvency coupled with insolvency of Limited Liability Partnerships (LLPs) and unlimited liability partnerships. While some experts believe it will benefit the economy in a long-term, others are apprehensive about its immediate impact.

Sahil Shah, Principal Partner, Square yards says, “The new law would play a constructive role towards securing the interest of various stakeholders involved such as buyers, investors, employees etc. By encouraging more transparency and accountability, it will indirectly nurture positive sentiments towards the real estate industry.”

Impact on real estate

The bill is expected to impact the real estate sector as well. According to a report in 2015, the Non-Performing Assets (NPAs) in real estate sectors were worth Rs 6,000 crore. There are several developers who have for various reasons delayed repayments of loan. Shrinivas Rao, CEO-APAC, Vestian avers, “There is a possibility that an insolvency and bankruptcy petition will be filed against them by the creditors of the company. In such a situation, the asset/property will be passed into the hands of an insolvency expert. For the creditors, it will be a boon. However, if the insolvency expert is not competent enough to deliver the project as per the standard, the buyer may be affected. 

The real estate sector will come under the purview of the Real Estate (Regulation and Development) Act, 2016; and the said property will come under the jurisdiction of the regulatory authority and be bound by the rules applicable to the sector. The buyer as a result may not be adversely affected as the Act is “buyer-friendly.”

However, no major change in lending to the sector is expected. “The main lenders for the segment are Private Equity, Non-Banking Finance Companies (NBFCs), banks and Housing Finance Companies (HFCs). These lending agencies have their own model of investing in real estate assets, which may be either at land acquisition, pre-approval, under-construction or ready property stage. Moreover, they also have their pre-defined lending structures like in equity or debt,” adds Rao.

The central government introduced the bill saying that they plan to improve the ease-of-doing-business in India. Solving bankruptcy and insolvency cases in a quick manner will create a positive effect in the eyes of foreign investors. This is also expected to facilitate efficient flow of capital in the real estate industry. Creditors will be able recover a larger part of their investment faster which will eventually allow them to re-invest in other projects. Also, the act will help real estate companies access the corporate bond market which will allow them to see the opportunity from fresh credit lines.

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