Nearly half the money spent on residential real estate in Manhattan during the first quarter of 2019 (45.4 percent, to be exact) was spent on the most expensive
What exactly are IBC and RERA in layman’s terms? How are they related?
IBC: Insolvency and Bankruptcy Code
Let’s say you got a lot of loan and are unable to repay. Logically, the bank and other people who gave you the money will take everything you own.
This didn’t happen as easily for companies. In India, companies which borrowed large loans and could not pay were not easily dissolved but became subject of never ending lawsuits. They fought on who should get paid first and how should the properties be sold, and by whom. Because of these never ending legal cases, the people who gave the loan [such as the banks] made large losses and this prevented them from giving loan to other businesses.
The IBC makes it easy and fast to dissolve a company that is no longer running. Courts appoint special teams that manage the dissolution and pay the creditors in a priority order.
This allows savings of tens of thousands of crores for the banks.. This is just for one bank alone. And that is why this law is considered a big game changer.
Not all struggling companies need to be dissolved [meaning sold as pieces with their building, furniture and other things sold separate]. In fact, if you can protect companies while they are falling, the outcome would be best for everyone. That is the second provision of the IBC.
When a company is struggling and find it hard to pay monthly EMI it can file with the court and ask for protection. The court can help restructure its debt to ensure the company runs for a certain time. By that time either the company gets back on track or gets bought out. Both of these are better outcomes for the creditors than to see the whole company broken apart in pieces.
For this to happen, the court would mandate certain “haircuts” to make each creditor give up a part of their rights to ensure the company’s survival or sale. For instance, Bhushan steel was recently bought by the Tatas. It resulted in SBI recovering 70% of its loan [earlier they would fight for 100% and never get anything].
The IBC is a key element to make India both a business friendly country and have a system that is fair both to businesses and the society in general [in the previous system the people who borrowed could dodge the law for a long time].
Now, the IBC is also expanded to include real estate — to make sure struggling real estate projects either are brought to life or sold to other companies — providing some return to the people who originally invested.
RERA is to bring fairness to real estate purchases. In the previous system the developers held all the cards. If you paid for a flat and it never got built or delivered on time, you are out of luck. The first provision of RERA is to have a government body regulating it, just as stock markets are regulated by the SEBI.
The RERA has provisions to make the property developers tell you the exact carpet area, make clear who owns the title, develop a standard sale agreement and most importantly make sure the money you gave them is locked in a proper account that is primarily used for construction.
The RERA is yet to provide sufficient benefits and is a work in progress. The state governments who are often influenced by real estate tycoons have been watering down the law and have been dodging the implementation.
A lot more work to be done in this case.