The bankruptcy law treats a distressed company as a single entity for debt resolution; however, given the complexities of the real estate sector, the corporate affairs ministry had considered treating individual real estate projects separately. The ministry’s original idea was to modify provisions of the Insolvency and Bankruptcy Code (IBC) for this purpose, and to specify such a carveout for the sector in law. However, this proposal will not make it to the IBC Amendment Bill, said one of the two persons quoted above.

“IBBI’s regulations enabling creditors to propose project-wise insolvency resolution will act as a regulatory sandbox. It has to be seen how it works under the existing ecosystem before further modifications to the Code,” said the first person quoted above, who spoke on condition of anonymity. Depending on the experience, the regulations can be modified, the person said.

The thinking in the government now is that amending the Code to give a special regime for one sector, for which Parliament’s nod is needed, will complicate the Code and spark similar demands from other sectors. The move to give some flexibility for project-wise debt resolution through regulations signals the government’s resolve to let creditors decide the direction of debt resolution, rather than writing it into law. Since 2018, home buyers are classified as financial creditors, and form part of the creditors’ panel deciding on bankruptcy reorganization of the distressed business.

The Insolvency and Bankruptcy Board of India (IBBI) on 15 February allowed administrators of bankrupt builders to invite rescue plans for each of the real estate project, or groups of projects. This effectively puts the ball in the court of creditors, who appoint administrators.

Emails sent to a spokesperson for the ministry of corporate affairs and IBBI on 4 March seeking comments remained unanswered.

Niranjan Hiranandani, Chairman of National Real Estate Development Council (Naredco), which works under the aegis of ministry of housing & urban affairs, said project-wise debt resolution is a sensible approach to addressing the distress faced by estate sector players. “Project-wise insolvency resolution is a very good idea because in the absence of such an approach, if a real estate company which has multiple projects faces a difficulty in one project, that creates problems not only for the corporate entity but also for other stakeholders like lenders and contractors to other projects leading to a cascading effect.”

For project-wise resolution, maintenance of separate books of accounts as well as bank accounts for each of the projects would be necessary. Such resolution has the advantage of not disrupting inventory of houses in other projects, which will not be covered by the restrictions applicable to the project in distress. That is a desirable feature because unlike banks, home buyers would prefer to get the homes handed over even if it means some extra payment. Meanwhile, banks would prefer to recover their investment even if it means taking a haircut.

Experts said creditors’ decision-making is accorded priority under IBC.

“The underlying principle of IBC is to let creditors exercise their commercial wisdom and take informed decisions on resolution of the corporate debtor. It is, therefore, appropriate for the regulation to provide that the committee of creditors can take a call on project-wise resolution. Project-wise resolution offers an effective measure for addressing home buyers’ problems. Managing project-wise resolution, however, requires different approach than resolution of corporate debtor as one entity,” said Ashok Haldia, an expert in accounting and auditing.