Real Estate Current Affairs

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 Promulgated

President Ram Nath Kovind has assented to the promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 on June 6, 2018. This ordinance makes some fine-tuning mechanisms in the Insolvency and Bankruptcy Code, 2016.

Key Points

This ordinance brings some specific changes affecting mainly real estate and financial sectors. The notable changes are as follows:

Homebuyers Recognized as Financial Creditors

After this amendment, the IBC law will recognize the homebuyers as financial creditors, giving them due representation in the Committee of Creditors (CoC). Thus, now home buyers will be an integral part of the decision making process. The CoC will also have representation from security holders, deposit holders and all other financial creditors.

Special Provisions for MSME

The amendment ordinance gives some special benefits to the Micro, Small and Medium Sector Enterprises. Now, the promoters of MSMEs are allowed to bid for their companies as long as they are not wilful defaultersand don’t attract any other related disqualification. This has corrected the anomaly in the section 29A of the existing act which had barred promoters of defaulting assets from bidding for their assets.

Withdrawal of Insolvency Application

The ordinance permits the withdrawal of the insolvency applications only if it is approved by 90% vote share of the CoC. Further, the CoC voting threshold has been brought down to 66 percent from 75 percent for all major decisions such as approval of resolution plan, extension of insolvency period etc. This is to encourage resolution versus liquidation.

Other provisions

Other notable provisions are as follows:

  • It brings more clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process.
  • Addresses some issues such as non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value of assets.
  • Exempts pure play financial entities from being disqualified on account of NPA and NPA acquired under Insolvency Code shall not disqualify an entity for the next three years.
  • Successful resolution applicants will get a minimum one-year grace period to fulfill various statutory obligations.
  • It also addresses the much litigated issue of enforcement of guarantees.

This part, the corporate debtors who want to themselves trigger insolvency will need shareholders approval via special resolution.

Significance for Real Estate

This ordinance provides relief to home buyers by recognizing their status as financial creditors. Due representation in the Committee of Creditors (CoC) makes them integral part of the decision-making process. Section 7 of the law will allow financial creditors to file application seeking insolvency resolution process. This is important because many home buyers are facing hardships on account of delayed and incomplete real estate projects.

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SEBI allows REITs, InvITs to raise funds via debt securities

Capital markets regulator SEBI (Securities and Exchange Board of India) amended guidelines of Real Estate Investment Trusts (Reits) and Infrastructure Investments Trusts (InvITs) in order to broaden scope of fund raising by such instruments.

Amended Guidelines

It allows REITs and InvITs to raise capital by issuing debt securities. REITs now require to have 50% stake in holding company marginally less from earlier limit of 51%. Like InvITs, REITs are now allowed to invest in single assets and can also lend to an underlying holding company. ​REITs have been allowed to lend to an underlying holding company or a special purpose vehicle (SPV).

Real Estate Investment Trusts (Reits)

Reits are investment vehicles that can be used by real estate players to attract private investment, while investors (both retail and institutional) can gain dividends generated from income-producing real estate assets like office buildings, shopping malls, etc. They are similar to mutual funds which provide opportunity to invest in equity stocks, whereas REITs allow one to invest in income-generating real estate assets.

In REITs, most of the earnings via sale / rent of such investments are distributed to its shareholders. Its purpose is to improve the liquidity position of Real Estate developers and give a secure avenue to investors to invest in long term. REITs are only for completed projects not the under-construction projects. They are primarily for commercial projects and mainly serve as an alternative investment.

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