India’s real estate insolvency landscape may be on the cusp of a major transformation, as discussions gain momentum around a dedicated project-level bankruptcy framework. According to India Ratings and Research (Ind-Ra), this reform could fundamentally reshape how distressed housing projects are resolved, offering greater protection to homebuyers and lenders.

Unlike the current entity-level corporate insolvency process—which often drags viable projects into prolonged, value-eroding moratoriums—the proposed framework aims to allow individual projects to undergo insolvency resolution independently. If implemented effectively, this shift could ring-fence performing assets, reduce contagion across a developer’s portfolio, and accelerate the completion of stalled projects.

The rating agency noted that the ongoing discussions within the Insolvency and Bankruptcy Board of India (IBBI) signal a structural shift away from the traditional entity-level corporate insolvency resolution process (CIRP), which has long been blamed for dragging viable projects into lengthy, value-destructive moratoriums.

It says, “The proposed reform—allowing individual projects to undergo insolvency resolution independent of the parent developer—is expected to ring-fence performing assets and prevent distress in one project from infecting an entire portfolio. This could benefit homebuyers, lenders and even resolution applicants, who would be dealing with a cleaner and more focused asset pool.”

The change builds on judicial precedents in cases such as Umang Realtech and Supertech, where the national company law tribunal (NCLT) and the national company law appellate tribunal (NCLAT) allowed stressed projects to be carved out for separate treatment, thus establishing the earliest framework for project-wise insolvency.

Ind-Ra emphasised that, while the direction of reform is promising, its success will depend on how precisely the framework is designed. How a ‘project’ is defined, how ring-fencing is implemented and how NCLT benches interpret creditor rights will ultimately determine whether the overhaul strengthens or complicates the real estate insolvency regime.

The agency stressed the need for strict escrow discipline, segregated cash-flows and transparency in the funding structure. Weakness in any of these areas could dilute the efficacy of the reform.

Srinivas Menon, associate director for corporate ratings at Ind-Ra, says the shift to project-level insolvency could meaningfully curb contagion across a developer’s portfolio by strengthening monitoring and cash-flow visibility. But he added that “the real test will be in consistent execution, particularly around inter-project liabilities, funding gaps, and preventing promoter carve-outs that dilute the intent of the reform.”

The current IBC framework, which typically places an entire developer into CIRP even when only one or two projects are stressed, has often resulted in halted construction across unrelated projects, funding freezes, severe delays and eroded confidence among homebuyers.

Ind-Ra says it believes that confining insolvency to a specific project’s balance sheet will reduce loss severity for lenders and home-buyers by avoiding dilution of recoveries across an entire pool of unrelated assets. “Narrower resolution scopes could also reduce timelines and improve outcomes for buyers desperate to see their homes completed.”

The rating agency expects the reform to enhance credit differentiation within a developer’s portfolio. Each project could be evaluated on its own financial strength, execution progress and sales traction rather than being weighed down by weaker assets elsewhere.

“Stronger ring-fencing, if implemented rigorously, may also encourage better internal governance, compelling developers to maintain strict escrow mechanisms, separate bank accounts and transparent inter-project funding structures. Over time, this could lead to more robust credit assessments by rating agencies, with governance factors playing a more prominent analytical role,” it says.

However, Ind-Ra warned that implementation risks remain substantial. It says, “Splitting projects within the same legal entity raises complex questions, including how creditor committees will be represented, how shared amenities and approvals will be treated, and how inter-project liabilities will be addressed. There is also the possibility that promoters use the carve-out mechanism strategically, offloading weaker projects into insolvency while shielding stronger ones.”

The agency noted that the real estate sector’s core problems—funding gaps, stalled approvals, cost overruns and poor construction progress—are not automatically solvable through a new insolvency framework. Many projects remain stuck not because of legal ambiguity but due to lack of last-mile financing, diversion of cash-flows or weak financial viability. These structural deficiencies, Ind-Ra says, will need coordinated action between lenders, RERA authorities and state governments for the reform to have meaningful long-term impact.

For corporate-level credit assessments, the agency stated that entity ratings will continue to depend on consolidated leverage, funding diversity and execution track record. Project-specific improvements may not necessarily translate into immediate stability at the corporate level until cross-default provisions, cash-flow fungibility and legal protections are clearly defined.

While the proposed framework signals a maturing insolvency regime, Ind-Ra says rating agencies are likely to adopt a cautious approach in the near term. Transitional legal challenges, ambiguities around guarantees and the absence of strong case precedents mean that the full credit benefits of project-level resolution may take time to materialise.

Nonetheless, industry experts believe the reform marks a pivotal moment. If India can create a transparent, scalable and enforceable project-level insolvency mechanism, it could restore trust in real estate resolution, accelerate stalled projects and strengthen the rights of home-buyers—an outcome the sector has sought for years, it added.