Policy Pulse | Government takeover of Unitech will set bad precedent

This episode could be flippantly termed Housing For All if it weren’t for the tragedy of people’s lost life savings. But the Supreme Court’s suggestion that the government takes over management of Unitech is a bad idea.  It is a moral hazard and will set a bad precedent.

In an observation on Thursday, the apex court pointed out that the government is obliged to protect the interests of home buyers. “We will ask the government to take over the management of the group. There are responsible government undertakings that will take over the group and complete the construction,” the court observed. To be sure, the SC has not passed an order in this regard and has said that it will seek the assistance of the attorney general in this matter.

The government superseding the board of a private company by nominating its own set of directors to manage the affairs of the firm is bad enough. It should be done only in special cases like say the IL&FS where there is a risk that the whole system might collapse.

But asking a government undertaking to finish construction of flats for a private developer is worse. It is akin to privatising profits and socialising losses. If there is a funding gap to finish construction of said flats, where will this money be raised? On whose balance sheet will it reflect? Most state-owned undertakings are already being run poorly and been used by successive governments for short-term gains like masking the true extent of their fiscal deficits. Do they need to be burdened further?

Of course, the government can just nominate a new board who can then look for new investors, just like in the case of Satyam Computer Services a decade ago. However, Satyam was a going concern and the problem was just a misrepresentation of financial statements. Real estate is in distress now and a new investor can’t be found easily. In that instance, the government will be left holding the baby.

Moreover, Unitech is just one among many rogue developers (to be sure, there might be those who genuinely failed too) that have not handed over flats or refunded the money to homebuyers. Will the government (and the tax payers by extension) be responsible for all these projects? The public exchequer can’t act as a guarantor for private firms.

Indeed, the government would better serve the interests of the public by enforcing existing criminal and civil laws.  There is a bankruptcy law in case to deal with defaults. Homebuyers have the same protection as financial creditors and a prominent case – Jaiprakash Associates Ltd – is undergoing resolution under the insolvency process.  Land parcels can be sold to raise money to refund buyers or finish building houses.

Yes, Unitech’s case is a bit different because it is a wilful defaulter. In Thursday’s hearing, Unitech’s forensic auditor told the court that the firm diverted Rs 1500 crore of homebuyer money. The auditor could not follow the money trail because Unitech isn't co-operating.

Allegations of fund diversion and fraud should be investigated thoroughly. Perpetrators must be brought to justice and the money recovered should be used to fund the construction. It speaks poorly of India’s law enforcement if it can’t force promoters to disgorge money.

As for homebuyers, they are realising that even a simple thing such as buying a house can be a risky proposition. Like bankers, they face the harsh reality of taking a haircut or worse. Selling land parcels when the market is down is going to lead to losses. That means completing projects may not be possible with existing funds. They are getting help from different quarters such as the government and judiciary but even then the going appears to be tough. Hopefully, strong enforcement of the Real Estate (Regulation and Development) Act will prevent such pain for homebuyers in the future.