tag:blogger.com,1999:blog-19649274.post2592348690210530768..comments2024-03-27T17:16:12.789+05:30Comments on The Leap Blog: Runs on real estate companies?Ajay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-19649274.post-13253245848356480032016-11-24T11:49:13.147+05:302016-11-24T11:49:13.147+05:30I think your example is the wrong way around. What...I think your example is the wrong way around. What do you do if a bank refuses to pay back your deposits? Interestingly, courts cannot force banks to pay you, without the RBI first checking the bank is solvent (liquidation of banks forms a substantial part of the banking laws of the country). If you pressurise a bank too much it can just raid someone else's account and pay you. This way it can kick the problem down (and make it bigger). To prevent that RBI monitors bank on a regular basis to separate client assets from it capital and make proper "repayments" from the banks equity capital. This is why whenever there is high NPA, the question of Capital Adequacy comes up, not of deposit/cash adequacy. A bank may be sitting on piles of cash but be bankrupt at the same time. <br /><br />I am not saying that the depositor/buyer should not be paid. All I am advocating is more care to ensure that the buyer is paid out of the "equity" of the real-estate company and NOT through some other buyer's deposit/advance. <br /><br />How do you know that the real estate company is refunding these buyers from their own advances (which is probably used up) or its equity? It is very possible that the real estate company is using another buyer's advance to repay this buyer; who before the Supreme Court. If that is the case then two of your statements need to be factually reviewed: <br /><br />1. It is not sure that the price is "relatively small" or being paid by the equity holders of the realty company. <br /><br />2. It is not sure that the side effects (more deposits of other buyers lost) of the surgery is actually less than the the benefits of the surgery (a small set of buyers getting repaid).<br /><br />While this thing "looks" like a Ponzi, I am not convinced it is one. A ponzi scheme has no underlying business. Here there was one, the building of houses. If all the houses were sold at higher prices, there was some chance to be repaid. I think it was built on an business model which is problematic and in hind-sight foolish. But you know what they say about hind-sight.<br /><br />You and (anonymous) seem to think that I am against the Supreme Court ordering repayment, or siding with real estate companies. I am not. I am just asking the Court to be more careful. The Court should ensure that the money being used to repay the buyers is not coming out of other deposits or that it makes the completion of the project impossible. In both cases it is not the real-estate company which will suffer, but other buyers. My suggested solution is actually far more Draconian than the present approach of the Court ordering "interim" payments. We must appoint administrators to look into the finances of the company. Effectively put them into insolvency or liquidation, to check if they are solvent and ensure that Paul's deposit is not used to pay Peter.<br /><br />My advice to other buyers (not asking deposits back) is also a rational one. I am not getting into the merits of a bank run, all I am saying is: There is a run on your real-estate bank, do not wait patiently to get your apartment, run to get your deposits back before someone else is paid with your deposits. Shubho Royhttps://www.blogger.com/profile/04193498880891547450noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-30818737732890681292016-11-17T12:54:20.209+05:302016-11-17T12:54:20.209+05:30Asking a real estate company to meet its contractu...Asking a real estate company to meet its contractual obligation is different from a bank run since a bank customer can anytime ask for a refund anytime while a real estate buyer will get a refund only under certain terms. The old real estate model which was no different from a ponzi scheme is certainly dead in the water. Imagine what will happen if a client takes a loan from a bank and does not pay the same - the the bank will go after the personal assets of the borrower and the same has to be applied to the builders as well.The judiciary is merely enforcing the contract so there is nothing to find fault with them at all. Coming to the fact that existing buyers would get affected, it is true but it is a relatively small price to pay. You cannot conduct a surgery without side effects Shubho!!! Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-85608716805863472822016-11-16T13:45:10.345+05:302016-11-16T13:45:10.345+05:30The intended comparison with “bank runs” seems to ...The intended comparison with “bank runs” seems to be an attempt to put home buyers in bad light and their demand for return bank as an activity bad for the economy. In addition, the article tries to impress upon the fact that judicial sympathy for homeowner by the supreme court will be even bad for the economy.<br /><br />However, following points can be considered before reaching such an appearing sympathetic inference biased towards builders:<br /><br />1)“Bank Run” cannot be equated to “Return Back Demand”:<br /><br />Bank run is defined as a withdrawal prior to maturity date. “Return Back Demand” happens after the deadline date. Hence, it would require lot of imagination to even call it as a demand. It is inafact a duty of the builder to pay back. Hence, while the bank run is a contractual right of the depositor, “return back” is a contractual and moral duty of the builder.<br /><br /><br />2)“Bank Run” are not predominantly random or self fulfilling phenomenon:<br /><br />The notion that bank runs are self fulfilling phenomenon is too old and outdated. Post 2000, the research had shown logic and empirical proofs that bank runs happens due to negative economic indicators prior to maturity date. Hence, bank runs are a rational economic activity on part of the depositor. On the other hand, “return back” is the last resort of a buyer who has been cheated by the buider by not completing the project on time. <br /><br />3)Supreme court judgement cannot be seen from economic theory logic:<br /><br />The supreme court judgement is on account of its duty to protect the contractual right of the home buyers. It should not be assessed by economic theory. Needless to say, there are many conflicting economic theory with many different conclusions<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-33756732008548898342016-11-16T09:43:29.357+05:302016-11-16T09:43:29.357+05:30Judges are not equipped to understand the larger i...Judges are not equipped to understand the larger implication of their decisions. Lack of basic knowledge of business and the workings of the economy is endemic. More often than not, they are are interested in having quotable quotes in their judgements Avinash Balasubramaniamhttps://www.blogger.com/profile/16079397960304873662noreply@blogger.com