IT raids on real estate companies: Is your investment safe?

HYDERABAD: How would a common man, who saves his hard-earned money to one day buy a shelter for himself and his family, react when he finds out that the real estate company he wanted to buy from was being raided by the Income Tax department?

There have been a series of Income Tax raids on many real estate companies - especially those in the high end apartments or villas business.

Should that be a cause of worry for a one-time buyer or any buyer? Were there any instances where the companies failed to deliver the homes due to such raids? Or, would the companies generally absorb such shocks and manage their compliances without impacting the customers?

Is there any instance where a large number of buyers were left in the lurch due to insolvency of any company/companies?

Absolutely not. IT raids on real estate companies does not mean that the company is legally under threat or that the company and all of their projects would be shut.

The IT department raids real estate businesses quite often, to keep note of their financial gains and losses and associate them to the taxes that they are paying. The searches are very common and it need not cause panic among the buyers.

In cases where the IT officials find that a company did not pay a certain required amount of tax, then the company is sent demand notices seeking payments. However, that does not mean the real estate entity would become insolvent.

In fact, real estate companies account for just five percent of Insolvency and Bankruptcy Code (IBC) cases.

If a real estate company is sent notices by the IT department, and the company finds the notice inappropriate, it could also raise a dispute at the Income Tax Appellate Tribunal. Most of the raids would in fact go for adjudication.

But what happens if a real estate company which you have invested in actually goes bankrupt?

The distress caused by the events - or rather lack of events - leading to the insolvency proceedings of real estate companies is well documented. One of the most important milestones in the evolution of IBC was an amendment which recognizes homebuyers as financial creditors. This means that homebuyers and their money are effectively considered at par with banks and other institutional creditors when it comes to recovering dues from real estate developers who have gone bankrupt. IBC is designed with a resolution timeline of 330 days in mind. However, the median duration for acceptance of a resolution plan takes substantially longer than that.

Prashant Thakur, Sr Director and Head of Research at ANAROCK group, a leading consultant in the real estate chain, said, “This change in the Insolvency & Bankruptcy Code (IBC) would likely have the impact of allowing for more targeted and efficient resolution of financial distress in real estate companies. By allowing proceedings to be initiated only against specific projects that have defaulted, rather than the entire company, It could help to minimise the disruption to the company's ongoing operations and potentially preserve value for stakeholders. It may also reduce the burden on the courts and other authorities responsible for overseeing the resolution process. Additionally, it may help to increase the chances of a successful resolution, as the focus can be on specific distressed assets rather than the broader company.”