The real estate sector has been facing a liquidity crunch ever since the collapse of Infrastructure Leasing & Financial Services Limited (IL&FS) in 2018 and the subsequent curbing of the shadow banking industry. The situation was further compounded by a stagnant economy, delayed revival of the Capex cycle, implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA), and a high indirect tax regime.
The pressure faced by the industry left a spate of bankruptcies in the developer community, and the solvent developers are struggling to complete projects due to a lack of funds.
To remedy the situation, the Special Window for Affordable and Mid-Income Housing (SWAMIH) Fund was set up in November 2019. It is a Securities and Exchange Board of India (SEBI)-registered Alternate Investment Fund – II, that is, an investment fund that does not undertake to meet day-to-day operational requirements as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012.
The funding is made on a 12 percent back-end internal rate of return (IRR) basis by subscription to Non-Controvertible Debentures (NCDs) subject to legal, regulatory, or other considerations.
The fund practice dictates that the project itself will be the collateral security against the funding which the fund authority will secure in the form of hypothecation of receivables, corporate or personal guarantees or pledging of shares, and so on.
Even though the fund authority solely finances the construction costs, such infusion of capital into the project enhances the financial health of the developer/owner as well. For instance, the fund authority ensures that the project is run by a specialist developer. This would attract additional credibility from homebuyers who manifest a fresh hope of securing their homes and feel confident enough to continue payments of their installments and other charges to the developer.
This leads to the infusion of much-needed capital into the company pool in terms of receivables and inventory sales.
Present trends show that developers, as well as homebuyers, are agreeing to revised possession and Real Estate Regulatory Authority completion dates. This certainly relaxes the financial strain on the company by decreasing the adversarial litigation costs, compensation, interest, refunds, or otherwise, required to defend proceedings under RERA.
Now, the fund authority indeed holds a superior charge on such inventory sales and receivables, but subject to specific deals. The market practice reflects that these proceeds largely remain in the company and are consumed by the authority to further finance the remainder of project construction costs, and also, to an extent, pay off its existing lenders.
This reiterates the fund’s objective that construction of the funded project is completed on a timely basis to make the homes available to the homebuyers. To this end, it must also be pointed out that homebuyers with homes in completed projects can liquidate their homes far more easily than in under-construction projects. Thus, completing projects is imperative.
The funding is also routed towards any pending regulatory and statutory payments to the Government, ensuring continuous legal/regulatory compliance, and consequentially, decreasing the cost incurred in defending statutory or non-statutory legal/recovery proceedings.
This further assists in avoiding unnecessary stalling, under an order of the court or otherwise, of the project’s construction, thereby ensuring timely completion of the project.
Although the focus of the Special Window is on the mid and affordable segment, alleviating the stress for the developers in this segment may have indirect collateral benefits for the entire real estate sector, including the luxury segment from where substantial financial boost can be secured.
The fund authority has shown enthusiasm to finance projects undergoing the corporate insolvency resolution process before the National Company Law Tribunal up to the stage where the resolution plan has not been approved/rejected by the committee of creditors.
Market practice indicates that the fund considers the judicial proceedings involved, penalties/dues to be paid, and approvals required (either not obtained or lapsed) to complete the project so as to not hamper the immediate revival of the project. However, it does prefer projects where the litigation is insignificant so that the cash flows from the project do not turn its net worth negative.
The SWAMIH fund thus has the potential to revitalize the ailing realty sector and bring cheer to thousands of stranded homebuyers across the country by funding stalled residential projects and consequently ensuring the delivery of their promised dream homes to home buyers without undue delays.
This article was originally published in The Leaflet on 4 June 2021 Written by: Ashoo Gupta, Partner.
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