If buying personal property is so difficult, how impossible would it be for ordinary investors to evaluate the convoluted disclosures and risk factors in the prospectuses of realty companies? At the same time it is unrealistic to expect them to stay away from a hot new sector. A few fund managers honestly admit that they are unable to evaluate landbanks claimed by realty majors either in terms of the legal validity of titles, property rates and post-development valuation claims (especially when it comes to holdings in smaller cities). Yet, many IPOs have already raised public money through expensive placements and continue to be quoted in the secondary market at astronomical prices.

This happens because of a convergence of vested interests to keep property rates and share prices at absurdly high levels. Yet, it is only the Reserve Bank of India (RBI) that has sounded the alarm bell so far and is making a serious effort to dampen the irrational exuberance in this sector. It has made it difficult for banks to lend recklessly to the realty sector by restricting Foreign Institutional Investment in realty IPOs and capping funding per individual for all IPO investment to Rs 20 lakhs.

The exorbitant valuation of realty stocks harks back to the Global Depository Receipts (GDRs) issues of the 1990s when foreign investment bankers actively encouraged price ramping and ended up duping their own investors. Most GDRs subsequently fell to a fraction of their offer price and some never recovered.

Can the Securities and Exchange Board of India (Sebi) do anything to protect investors in time? Yes it can. Past experience shows that investors usually lose money due to greed and hype by subscribing to expensively priced IPOs or through secondary market investment. But investors lose money just as fast when their well-paid fund managers are induced to buy expensive stocks either due to pressure from investment banks of the same management who lead manage these issues (officially, every financial conglomerate claims Chinese Walls and points to compliance procedures, but they have never worked during any manic phase) or their own greed. Investors lose money either way.

... contd.