Sucheta Dalal :RBI's crunchy blow will make it harder for realtors
Sucheta Dalal

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RBI's crunchy blow will make it harder for realtors  

Apr 2, 2007

The Reserve Bank of India’s (RBI) Friday night blow seem set to throw Indian business into another long spell of doom and gloom as the liquidity crunch administered by it begin to play out. Interest rates will rise further leading to possible defaults in consumer loans and mortgage payments, cut back consumption, affect production and force companies to reassess their growth plans. This time, large Indian companies may be more resilient, since they are no longer limited to the domestic market and can also borrow cheaper abroad. However, the sectors that will probably take the brunt of the pain may be banking, realty and small businesses.

Leading bankers tell us that many nationalised banks will soon have to start issuing profit warnings. As for realty, one would say that the Securities and Exchange Board of India’s (Sebi) decision to tighten IPO (Initial Public Offering) regulations, has been in the nick of time, at least for retail investors.

Sebi’s homework leading up to its board decision on valuation and disclosures paints an extremely worrying picture that is nowhere evident in the glitzy advertisement campaigns of developers, spiraling realty prices and the massive construction activity in all towns and large cities of India. In a report to its board of directors, the regulator identifies the hype in 2006 over DLF’s plans to raise Rs 13,500 crore, as a sort of starting point for spiraling realty valuations.

This followed a burst of global publicity about undervalued Indian realty and the potential upside as smaller towns join in India’s economic prosperity. Reputed international publications were making predictions about the coming of age of India’s listed realty sector with rarely a mention of messy ownership regulation and the utter lack of standards in the construction industry. On the valuation front, the red herring prospectus of DLF filed in May 2006 had two valuation reports by well-known international consultants for the same 228 million square feet of land. Cushman and Wakefield India valued the land as anywhere between Rs 77,165 crore to Rs 85,288 crore, while Jones Lang Lasalle Property Consultants valued the same land at a hefty Rs 91,052 crore. A stunning difference of nearly Rs 14,000 crore!

Sebi further examined the prospectuses of 12 realty issues and found that seven companies had made no disclosure about land banks (many of them went ahead and raised public money at a huge premium) and in five cases, although the valuation was disclosed, it included a substantial percentage of land that was not owned by the company. The realty sector alone provides ample reason to give investors a snapshot of corporate fundamentals in the form of an IPO grading. Yet,there are plenty of experts who continue to lobby hard against IPO grading as an investor protection tool, claiming that ordinary retail investors ought to be smart enough to cut through dubious valuations and incomplete disclosures without expert help.

The post-issue performance of realty companies listed between April 2006 and January 2007 only underlined the need for tightening the rules. Consider these: The controversial Atlanta Ltd, which was subject of a detailed Sebi investigation issued shares at Rs 150, was listed at Rs 192. Its shares were later ramped up to a high of Rs 1,446 and its last traded price was down to Rs 269.49. Parsvanath Developers raised nearly Rs 1,000 crore by issuing shares at Rs 300. They opened for trading at Rs 456.70 and the last traded price was Rs 265. Akruti Nirman raised Rs 361 crore at an issue price of Rs 540. It was listed at Rs 701 and has been trading down since then to Rs 410. Sobha Developers raised Rs 570 crore at Rs 640 per share. The scrip trades at Rs 803 after having opened at Rs 968. Along with D S Kulkarni it is among the few realty companies still trading at a premium to offer price. D S Kulkarni’s offer price was Rs 132 and its last traded price was Rs 265 on March 30. Somewhere along the way, half a dozen developers floated overseas entities and got their shares listed on London’s AIM market. This party ended abruptly when most shares started trading at a discount within days of listing.

Sebi initially tried to bring sanity to the valuations by insisting that valuers would be liable to investors for untrue statements but this apparently did not make a difference. Sebi’s secondary market advisory committee on disclosures then proposed a series of improvements in disclosure norms that have since been cleared by the board at its recent meeting.

At the end of February 2007, seven companies had filed draft prospectuses with Sebi to raise approximately Rs 17,400 crore from the capital market. These include DLF Ltd, which plans to raise Rs 12,000 under a new prospectus and Housing Development and Infrastructure Ltd (often confused with the blue chip HDFC), plans to raise Rs 2,000 crore. Two companies, Omaxe and Purvankara Projects, plan to raise Rs 1,200 crore each while Orbit Corporation which got a low rating (one out of five) made an offer to raise Rs 150 crore. Others in this pipeline include Kaushalya Infrastructure and IVR Prime Urban Developers (which plans to raise Rs 830 crore). Of all the companies mentioned in this column so far, only four have disclosed the extent of land that is actually owned by the company or its subsidiaries.

This was the sorry state of affairs when Sebi tightened the screws on valuers and tightened disclosures and made IPO grading mandatory. The impact of Friday’s fresh liquidity squeeze has still to be factored in to check the fate of realty prices and the fund raising plans of developers in the coming months. However, if foreigners are willing to fund construction, the construction boom may continue with a reality check on pricing.

-- Sucheta Dalal