Home-buyers as financial creditors: Developers' default risks spike with delayed projects, says Icra

There have been various instances of aggrieved home-buyers initiating insolvency proceedings against developers who have delayed project execution.

Press Trust of India February 19, 2019 16:24:17 IST
Home-buyers as financial creditors: Developers' default risks spike with delayed projects, says Icra
  • Last August, Parliament had passed an amendment to the IBC allowing home-buyers to be treated as financial creditors

  • The time-bound nature of the insolvency process provides a limited window for developers

  • Some of these companies could reach settlements with the claimants resulting in closure of the insolvency proceedings

Mumbai: Treating home-buyers as financial creditors under the bankruptcy law has increased the default risks for developers with delayed projects, warns a report.

Last August, Parliament had passed an amendment to the Insolvency and Bankruptcy Code (IBC) allowing home-buyers to be treated as financial creditors.

In recent months, there have been various instances of aggrieved home-buyers initiating insolvency proceedings against developers who have delayed project execution.

The time-bound nature of the insolvency process provides a limited window for developers to reach a settlement with the aggrieved buyers, failing which the resolution
professional takes over the management, rating agency Icra said in a report Tuesday.

According to a report by rating agency Icra as the amounts paid by home-buyers now constitute a financial debt, any delay in handing over the property as per the commitments in the sale agreement can be ground for initiating the insolvency proceeding under the IBC.

Homebuyers as financial creditors Developers default risks spike with delayed projects says Icra

Representational image. Reuters

"Even a single buyer in a single project pursuing such a remedy can put the company at risk of financial default, irrespective of the liquidity position of the company," the report warned without quantifying the defaults by the number of companies.

Managing such risks will be a challenge for developers, especially those who have legacy projects where completion has been affected by factors such as weak sales, falling prices or inadequate funds, it added.

According to the Insolvency and Bankruptcy Board of India website, some companies against whom claims were admitted in recent months include Puri Construction, Pioneer Urban Land & Infrastructure, Emaar MGF Land, Vardhman Buildtech and Sikka Infrastructure.

Some of these companies could reach settlements with the claimants resulting in closure of the insolvency proceedings, the report said, adding but in some other cases they could not obtain a stay on the proceedings from the Supreme Court.

"However, if such remedies are not in place before the resolution professional takes over the management, debt servicing can be at risk as the RP may decide to enforce moratorium on any such payments while the resolution proceedings go on," the report said.

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