Who Bears the Cost? The Urban Project Finance Crisis in India

Introduction

The lack in urban infrastructure in India is not a capital issue but a coordination issue. Mega-projects, such as Jaypee Infratech and multiple Smart City projects have failed due to regulatory incoherence. The Insolvency and Bankruptcy Code, RBI prudential norms, and SEBI’s REIT framework operate rationally as per their respective mandates. They all add up to systemic failure, not of institutional actors, who insure themselves in a reasonable way, but of retail homebuyers and small contractors who lack an analogous way of insuring themselves.

I. Risk Allocation as Regulatory Design.

When urban projects hit distress, the legal framework determines not just who loses money, but how failure costs are distributed across society. The existing architecture of India continuously imposes those expenses on the most vulnerable sides.

Delays in regulations (land purchases, the movement of environmental clearances) are absorbed by developers and transferred downstream to RERA homebuyers, in a law where the enforcement is inconsistent between states. The liquidity gaps at the construction stage force developers to turn to expensive NBFCs or collateral-free homebuyer advance payments and turn the common citizen into a risky unsecured venture capitalist. As a result of the subsequent insolvency, these homebuyers are placed behind secured monetary creditors under the IBC waterfall mechanism. The instruments are internally consistent. They combine to create a system where the people who are at the highest risk at the construction stage are given the lowest level of insolvency protection.

II. The Structural Misfit of Urban Development in IBC.

IBC was never created to address socio-economic complexity of urban development, rather it was created to address corporate distress in an efficient manner. A corporate debtor is a legal person. Thousands of displaced families, idle supply chains, and unproductive assets make up a stalled housing project. These involve various legal tools, and the IBC only offers one.

In 2025, the amendments to the IBC introduced Regulation 4E of the CIRP Regulations, which allows for the transfer of possession of completed units to homebuyers in the course of an unfinished resolution procedure. This was a substantive amendment to the earlier freeze-all doctrine, which had frozen-out buyers of completed apartments in a perverse manner as insolvency proceedings dragged on interminably. But there is still the structural gulf: the IBC does not have a system to ring-fence individual projects in a corporate group. The failure of one project can cause group-wide CIRP, in which solvent entities are swept into proceedings in which they have no business. In 2026, insolvency proceedings in real estate are habitual violations of the statutory 330-day schedule, and a number of high-profile cases take more than 600-700 days to resolve, turning a time-restricted process into an indefinite administrative holding position.

The Jaypee Infratech case, which was finalized by the December 2025 Supreme Court directive permitting Suraksha Group, is educational. Homebuyers recovered asset value of 85-95 percent (nominally); institutional creditors took a haircut of 62-68. However, the homebuyer figure masks ten years of inflation and lost returns. More importantly, the settlement became successful only in part due to the intervention of the Supreme Court, not due to the adequacy of the mechanisms that the IBC used. That differentiation is of critical importance to cases that do not receive the same judicial treatment.

III. Banking Regulation and the Credit Vacuum of the Construction-Phase.

The conservative real estate exposure policy of the RBI is a systemically rational decision that leads to an unsustainable project result. The capital necessary in the process of building is most required, and strict NPA classification norms make banks very risk-averse at this stage. The developers are driven to expensive NBFC borrowing or pre-sales to the homebuyers, which shift the construction risk to the parties that are the least suited to handle it. The fact that the RBI has finally decided to make municipal bonds eligible as repo collateral at the end of 2025 is progressive, but it will take time for this to transmit to project level credit based on the willingness of banks and ULB creditworthiness, which the RBI has no direct control over. The prudential regulation was designed to cushion balance sheets of banks. Devoid of additional tools to finance the construction phase, it will keep doing exactly that at the cost of urban development.

IV. REITs and the Prejudice of Finished Property.

The January 2026 notice by SEBI that REITs would be classified as core equity instruments of mutual funds expanded the range of institutional investors and improved mainstream integration into their portfolios. It failed to discuss the structural bias by which REITs are not applicable to financing at the construction stage. SEBI regulations demand that 80 percent of REIT assets should be fully income earning and complete. This is a reasonable limit on the protection of investors and indicates that REITs act as vehicles of exit by institutional developers and not as providers of green field capital. The dividend of development of REIT liberalisation is yet to come. The finished assets developed by developers are monetised by way of REITs; none of the money ends up at the construction stage where it is most required. Such a gap would start to be bridged by a separate category of greenfield REITs whose risk disclosures and expected returns are differentiated from assets at the development stage. Similar facilities are present in Singapore and Australia. India is capable of having such as regulatory framework.

V. Recommendations

There are three reforms required, which are in the form of a package, as opposed to being applied individually.

One, the IBC should be amended to include a project-specific reverse-CIRP regime that isolates individual real estate projects in corporate groups, appoints a project-completion specialist with the authority to proceed with the construction process in case of a resolution, and hard timelines with judicial remedies in case of breach.

Second, SEBI ought to establish a greenfield REIT classification either via a legislative amendment or a regulatory notification that has a prescriptive reinvestment condition directing the proceeds to be invested in urban projects at the construction stage, as opposed to secondary market recycling.

Third, the Urban Challenge Fund model, whereby cities must crowd in 75 per cent project spending from private markets, should be accompanied by a statutory coordination unit, not another regulator, but a cross-regulatory mechanism between RBI, SEBI and RERA powers, with the mandate to issue binding cross regulatory guidelines around strategic urban projects. Mandating private co-financing without changing the circumstances that render it unappealing is an unmechanized mandate.

Conclusion

The problem of regulatory fragmentation in the Indian urban finance is neither caused by bad intentions nor by the incompetence of institutions. Every regulator is performing its task. The issue is that no one is performing the task of ensuring that these regulators pull together to serve urban development. The policy environment in 2026, including policy changes, amendments to the IBC, eligibility of municipal bonds for repo, and REIT reclassification indicates a real interest in reform. The only thing that is lacking is a co-ordinating legislative vision that would connect these instruments into a consistent framework. In its absence, the cycle of post-failure litigation and socialised losses is going to persist. The issue is whether India will get ahead of the next Jaypee.