Sucheta Dalal :Realty Check
Sucheta Dalal

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Realty Check  

July 2, 2008

Exclusive news, the stories behind the headlines and the truth between the lines Edited by SUCHETA DALAL

Realty Check

The Reserve Bank of India’s 24th June hike in CRR and repo rates will deal a blow to the realty sector and, hopefully, force a swift reality check. It has long been evident that the realty bubble was set to burst -- property prices and rentals had soared to a level where business was turning unviable. Several mid-level restaurants in Mumbai had to shut shop when their lease came up for renewal and a dip-stick study of Mumbai’s suburban malls by MoneyLIFE showed that most storekeepers were dissatisfied and complained that sales didn’t match the developers’ promises; so, the rentals were killing. This was at a time when the economy was growing at 9%, crude oil had not touched $100 a barrel and inflation was just 5%. Only interest rates had been inching upwards.

Yet, developers furiously planned new projects riding high on a flood of private equity funding. They told the media that prices would drop 15% to 20% which was a manageable decline. As happens during the peak of a cycle, nobody expected things to deteriorate so rapidly. Construction costs (cement, steel and labour) have nearly doubled, while the economic slowdown and rising interest rates have caused buyers to vanish. India’s consumption-led economic boom was fuelled by increased middle-class affluence and aspirations, which is why the biggest demand for apartments was at a price point of Rs30 lakh. But high inflation and soaring mortgage rates have dealt a blow to this segment as well.

Lower consumption and growth also seems set to end the mall-mania in metros and cities. Rentals will tumble and undermine the viability of several luxury malls. Ironically, many of these mega malls may have been up and running but for delays due to bureaucratic hurdles. Had the government set up a suitably empowered realty regulator charged with development and supervision, it could have reined in malpractices while creating a policy framework for efficient project clearances, which are being cited as the main cause for construction delays. In 1992, the Securities and Exchange Board of India (SEBI) got its statutory teeth after the Harshad Mehta scam; maybe the 2008 crash in property prices will push the government to set up a realty regulator.

Weak Market Infrastructure

A couple of months ago, when the market for initial public offerings (IPOs) was extremely promising, one CEO said he was in queue to take his company public because there was a shortage of good investment bankers and the top five or six apparently had a waiting list of a few months. The scarcity of capital market infrastructure is worse, when it comes to Registrars & Transfer Agents (R&TAs). Karvy was the biggest, but its business has been stopped after SEBI indicted it in what is called the IPO scam. MCS never recovered from the four-year-old mess over handling ONGC’s IPO. Tata Share Registry has been acquired by Darashaw & Company in 2005 and is one of the bigger ones. Then there is Intime Spectrum, which recently signed up to give a majority stake to the Link Group, which operates in Australia, New Zealand and South Africa. This could make it the biggest player in this business, but for a big hitch. Two years ago, Intime Spectrum had signed up to acquire the R&TA business of MCS but the deal fell through. MCS has filed a case and has even objected to Intime’s deal with Link. That leaves some small R&TAs who do not have the reach to handle large IPOs. Why has the R&TA business lagged when the capital market had been in an unprecedented bull run? According to SEBI sources, most R&TAs have beaten themselves down to ridiculous rates. One apparently charges as low as Rs30,000 per annum -- a price at which it is impossible to hire even a peon these days. The explanation is not convincing, because R&TAs operate in a free market and scarcity alone should have allowed them a significant hike in fees.


It is interesting how action against Sahara India Finance always crops up when the ruling government needs some leverage to arm-twist certain politicians. This time too, Sahara has emerged the winner after the threat of harsh action. After a meeting with RBI officials, Sahara has been told to wind up business by 2011. This is one year more than what RBI had allowed it earlier. Since RBI never issues ‘speaking orders’, the public remains clueless about the seriousness of Sahara’s wrongdoing. In this case, its faceless depositors also remain unperturbed by the threat of regulatory action. Meanwhile, Sahara’s mutual fund and insurance business remains unaffected by the hullabaloo. Interestingly, while digging for information on this mysterious group, we discovered that, at some point of time, Sahara was also a depository participant but it quietly shut down the business.

Where Is the BSE Headed?

A couple of issues ago, we wrote that the Bombay Stock Exchange (BSE) could go the way of India’s 20- odd regional bourses once cross-margining becomes effective. That is because BSE’s derivatives business is inconsequential. It now appears that BSE is nowhere in the race to start currency futures either. That is probably because it is grappling with factionalism and squabbling among the ranks of senior management. Things came to a head in the second week of June after SEBI called the entire board for a meeting. Two directors quit soon after, but apparently for different reasons. Jamshyd Godrej quit because he is busy, while Shekhar Datta, BSE’s chairman, quit with a cryptic comment about “micro management” by the board.

But that merely draws attention away from BSE’s many serious problems, the foremost among which is indifferent management and the absence of a sense of ownership. For several months now, the BSE board has been torn apart by factionalism and layers of conflicting interests. Its CEO, Rajnikant Patel, has been at loggerheads with his chief operating officer (COO) Ashok Raut, who quit recently after Patel complained about him to the capital market regulator and the finance ministry. Patel has also been grumbling about the interference by broker-directors in surveillance issues. The broker-directors hotly deny the charge while Patel does not respond to our queries.

A bigger controversy at the board has been over BSE’s contract with OMX AB, a Swedish company, for “trading and clearing systems to strengthen BSE’s derivatives and securities trading capabilities.” Some board members have complained to SEBI that Patel and Datta signed the contract without adequate discussion at the board level. The contract, for an eye-popping $60 million (a closely guarded secret), is higher than what some technology-intensive capital market institutions have spent on systems and software in over a decade of existence.

What is worse, the BSE does not seem to be making any serious effort to list its shares and this is upsetting foreign investors, including the Deutsche Bourse which has been denied a board directorship. Clearly, the exit of the BSE president will not resolve its more serious problems. What the Exchange needs is a bigger revamp than merely appointing another board member, Jagdish Capoor, as the president. More important, what SEBI needs is some fresh thinking on stock exchange ownership in order to foster growth and competition among bourses. The 5% cap on ownership is rendering other bourses rudderless while the National Stock Exchange moves towards a monopoly. We believe that SEBI is inclined to reconsider the ownership issue and may even permit 24% investment by another exchange - Indian or foreign. While such a move would make eminent sense, the government must also ensure uniformity of regulation between the capital and commodity markets on key issues such as ownership and management.

-- Sucheta Dalal