Housing lifeline ticks the right boxes. Execution is key

Maadhav Poddar

The Cabinet led by Prime Minister Narendra Modi, on November 6, 2019, approved a special window to provide funding to stalled affordable and mid-income net worth positive housing projects. This package is in line with the announcement made by Finance Minister Nirmala Sitharaman earlier this year.

The real estate sector has been reeling under stress for the past few years and homebuyers have been at the receiving end, saddled with a double liability of rent and EMIs (Equated Monthly Instalment). This package is intended to provide the much-needed last mile funding to stuck real estate projects in the affordable and mid-income category and ensure the homes are delivered to the buyers.

As they say, proof of the pudding lies in the eating and hence, whether the intended objective will achieve its purpose will depend on fast, efficient and transparent implementation of the package. The announcement, of course, is a step in the right direction.

What is commendable is the package covers projects that have become NPAs (non-performing assets) or have been referred to the NCLT (National Company Law Tribunal) under the IBC (Insolvency and Bankruptcy Code) – which is a departure from the earlier announcement and is indeed welcome. In the event of a non-coverage, a lion’s share of stranded housing projects would not have been eligible, potentially making the package irrelevant.

Salient features

1. A Category 2 AIF (alternative investment fund) will be set up with the government as a sponsor. The government will contribute Rs 10,000 crore and reach out to LIC, SBI and sovereign wealth funds to take the corpus to Rs 25,000 crore.
2. SBICAP Ventures will be the investment manager.
3. The AIF will invest in companies through debt and not equity.
4. Cases pending before High Courts and the Supreme Court will not be eligible.
5. Affordable or mid-income housing have been defined to include any housing projects wherein units do not exceed 200 square metre RERA carpet area and are priced as below:
   • Up to or less than Rs 2 crore in Mumbai Metropolitan Region
   • Up to or less than Rs 1.5 crore in the National Capital Region, Chennai, Kolkata, Pune, Hyderabad, Bengaluru and Ahmedabad
   • Up to or less than Rs 1 crore in the rest of India
6. Only net worth positive projects will be considered. It means those projects where value of receivables plus value of unsold inventory is greater than the completion cost plus outstanding liabilities at the project level.

The finance ministry has released a set of 37 FAQs that provide some insights into the package and can be accessed on their website.

Some of the safeguards and caution points the government must take care of to ensure achievement of the intended objective during implementation are as follows:

1. It needs to act fast and come out with the specific procedural formalities that need to be followed to access funding – for example, will the developer be required to prepare and present a business plan in a particular format, who will certify the net worth positive criteria, standard format of a due diligence report to be submitted and the like. This is imperative to ensure there is clarity and transparency and quick implementation.
2. The criteria for selecting projects/ developers need to be (i) clear (no room for ambiguity or interpretation), (ii) objective and measurable, (iii) away from conflicts or address them appropriately and (iv) communicated to all concerned. Given the affinity of Indians to litigation, this is extremely important to ensure this package does not itself land up at the court’s doorstep. And the last thing one would want to see is a scam.
3. While making SBICAP Ventures as the investment manager is understandable from the financial knowledge perspective, it’s important to rope in people with knowledge of the real estate sector and housing. Without this, it’s not possible for the investment manager to appraise the projects realistically. This could be challenging as real estate is a very micro-market specific business. Therefore, a good team needs to be put in place fairly quickly.
4. Post funds disbursement, monitoring is key in ensuring that the funding is applied at the right place and in the right timeframe. Again, guidelines are required on how the monitoring is done – Should the AIF appoint and external agency or do this in-house? I don’t believe that any chances can be taken, given the past record.
5. Striking the right balance between returns to the investors of the AIF and safeguarding their funds while providing funding at affordable rates would need a fine rope balancing act.

Given that cases pending before high courts and Supreme Court are not covered, some of the larger real estate companies such as Jaypee, Unitech and the like with thousands of waiting homebuyers will not benefit from this package. But bringing them into the ambit could risk the overall implementation of the package, considering their legal tangles.

In view of the considerations listed above, the implementation of the package is going to be very tricky and taxing, but an interesting and exciting journey. The announcement did go down well with the industry, which is visible in the stock prices of realty firms.

The government has also raised hopes of homebuyers with the announcement of this package and it becomes even more important to now implement it quickly and in a right manner.

 Maadhav Poddar is Tax Partner, EY India. Views are personal.