India’s insolvency regulator has introduced a new framework designed to shield financially sound real estate projects from being swept into bankruptcy proceedings alongside their developers. The move, aimed at protecting homebuyers from unnecessary construction delays and registration hurdles, comes as the real estate sector accounts for 22% of all insolvency cases, ranking it as the second-largest segment under resolution after manufacturing.
Under the regulations notified by the Insolvency and Bankruptcy Board of India (IBBI) on October 30, a committee of creditors (CoC) is now empowered to recommend that specific projects be excluded from the Corporate Insolvency Resolution Process (CIRP). This can occur even if the parent developer has been admitted into insolvency proceedings. For an exclusion to move forward, it requires approval from creditors holding at least 66% of the voting share and must subsequently receive clearance from the National Company Law Tribunal (NCLT).
Previously, the admission of a developer into CIRP often triggered a blanket moratorium that placed all of the firm’s projects under the bankruptcy process. This systemic approach frequently left owners of apartments in completed or financially viable projects facing disruptions in maintenance and uncertainty regarding unit registrations, despite those specific projects not being responsible for the company’s broader financial distress. By facilitating project-wise insolvency, the new rules allow for a more nuanced resolution process.
To ensure transparency, the updated regulations mandate that a resolution professional must present project-wise information to the CoC during its first meeting. This includes details regarding registration with the Real Estate Regulatory Authority, current construction stages, occupancy status, and the breakdown of completed versus incomplete units. Furthermore, the new rules require the maintenance of a separate bank account for every real estate project, ensuring that funds are utilized specifically for the project they were intended for, in compliance with the Real Estate (Regulation and Development) Act.
The regulator stated that the framework is intended to enhance accountability and strengthen the interests of stakeholders. As part of the improved oversight, the resolution professional, with the backing of the CoC, must appoint independent professionals to provide a technical assessment of each project’s condition and the cost required for completion. This assessment must be included in the information memorandum before expressions of interest are invited, helping to reduce information asymmetry and encourage more realistic bids from resolution applicants.
These changes also provide the CoC with increased flexibility to approve requests from homebuyers for the possession of their apartments or plots, potentially easing the registration process for those caught in the middle of a developer's insolvency. While the regulations take immediate effect, legal experts anticipate that the courts will clarify their precise application to cases that were already admitted into the insolvency process before the October 30 notification.
The policy change is the culmination of several months of deliberation, following discussions in late August and a formal proposal released by the IBBI in June. As the industry grapples with the insolvency of notable developers such as Supertech, Raheja Developers, Today Homes, and Ajnara, this shift marks a significant evolution in how the Insolvency and Bankruptcy Code is applied to the real estate sector. By allowing for project-specific considerations, the regulator seeks to decouple healthy assets from distressed corporate entities, providing a clearer path for project completion and delivery to buyers.
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