Jaypee Insolvency – What right does a flat buyer have?

I sincerely hope that Jaypee Wishtown doesn't end up being only a wish !

The case is as curious as that of Benjamin Button !

I really look forward to the final outcome as it will answer many sensitive questions and can have far reaching consequences –

  • How do we empathize with a consumer who invests his hard earned taxed money? People have invested as high as Rs 1 crore per flat.
  • What do we do to the banking system that is full of inefficiencies?
  • How do we punish the ever greedy developers who fleeced the actual money?

Till few weeks back I never even thought about the question raised in the subject. I always presumed that when someone buys/ books an underconstruction flat he is actually buying a flat with a clear right over it. But it seems that is not the case as buyers in Jaypee case have been asked to fill forms related to that of unsecured lenders !

I still cannot fathom this. HOW???

——– Think about it, when you go to buy a flat have you ever in your wildest dreams thought that you are actually lending money to the developer? And if thats something which you would have been told, would you have still gone ahead and done it?

——– When we buy a flat we don’t enter into any typical lending agreements? Neither do we get any periodical interest payments nor is there a fixed repayment obligation from the developer. On the contrary the payments are linked with construction of the flat and the mortage loan has the underlying flat as the primary security. So are we now saying that mortgage lenders don’t have the security that they always thought they have ! If that is the case, time to short all mortgage lenders in India.

So my point number 1, how on earth does a flat buyer becomes an unsecured lender and not the primary owner of the flat ?

Point number 2 – the case of secured lenders i.e. banks

Please note they are different from the mortgage lenders mentioned above. These are primarily construction/ project loans and are directly given to developer (Jaypee in this case) whereas mortage loans are given directly to flat buyers. Though in both cases, the money is finally provided to the developer. Brilliant, isn’t it !

The same property getting funded twice…. both having same property as underlying security… in many cases the same bank giving project as well as the mortgage loan….. and despite double funding the developer not finishing the project !

Inefficiencies and greed at full display here ! and the loser as always first the end consumer and then the taxpayer (if the government bails out the troubled banks).

So a key question keenly watched here would be project lender’s right vis-à-vis that of the flat buyer? The project lender and the mortgage lender were always aware about the issue with double funding and despite that it seems they are been allowed a right superior to that of the flat buyer.

Lastly and the most important of all is the question as to what actually happened to all the money that the developer received and how does one recover that.

Everyone knows that there is a web of companies that any of these developers operate through. There are innumerbale related party transactions that happen between these companies – some reported and most not. The task now is to put in real hard work breaking this web and setting an example by making all of them accountable in a time bound manner.

I sincerely hope justice prevails and it sets a landmark case for all future transactions. Indian consumer is tired of becoming a bali ka bakra everytime and now really hopes that he gets his acche din. There are very high hopes from the current hard working Indian government and I am sure they will not let us down.

Disclosure: I am not invested in Jaypee Projects and have no vested interest.

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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Anna Kieu
Anna Kieu
10 months ago

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