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Cabinet clears tweaks to bankruptcy code; home buyers, SMEs may get relief
Law minister Ravi Shankar Prasad | Photo Credit: Shah Junaid/VCCircle

The union cabinet on Wednesday approved amendments to the Insolvency and Bankruptcy Code (IBC), bringing changes widely expected to help home buyers and small and medium-sized enterprises.

Law minister Ravi Shankar Prasad confirmed at a press briefing that the cabinet had cleared an ordinance to amend the code but declined to reveal any details pending approval from President Ram Nath Kovind.

However, media reports citing sources said the changes include treating homebuyers on a par with financial creditors. This will bring some cheer to people hassled by delayed residential projects by helping them recover dues from bankrupt or insolvent developers.

The government also reportedly included special norms for SMEs as part of the ordinance, although few details were immediately available.

Separately, Business Standard reported that the government is also understood to have amended Section 29A of the insolvency law to make it less stringent. The section restricts entities related to the bankrupt companies from bidding for those companies.

Ramesh Nair, CEO and country head at real estate consultancy JLL India, said the decision to treat homebuyers equal to banks while recovering dues from stressed realty firms is a welcome move.

Previously, homebuyers were regarded as merely consumers and could not specifically claim for liquidation. This placed them at a disadvantageous position and exposed them to significant risk in under-construction projects, Nair said. The latest decision will give confidence to homebuyers to invest their money in real estate, he added.

This is the second time within six months that the government is tweaking the law via an ordinance, which are issued when parliament is not in session. In November, the cabinet had approved changes aimed at preventing wilful defaulters—those who deliberately avoid repayments—from bidding for stressed assets they previously owned.

The government had passed the bankruptcy law in 2016 to making it easier to force companies into insolvency. The move was part of efforts to cut banks’ bad loans that now total around $147 billion.

In June last year, the Reserve Bank of India identified 12 of the largest loan defaulters and ordered lenders to start bankruptcy proceedings against them. The 12 accounts constituted about 25% of the overall gross bad loans.

Last week, one of those 12 cases was finally resolved when Tata Steel Ltd completed the acquisition of Bhushan Steel Ltd after receiving all necessary approvals. A couple more cases are also nearing resolution, but several others are embroiled in legal disputes among the bidders.

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