RBI’s crunchy blow will make it harder for realtors

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.

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