Sales registrations down ‘only 9%’ y-o-y, PE investments coming back
Possibly leveraging on healthy transaction numbers in the secondary market, Mumbai’s real estate in December showed positive signs, with only 9% decrease on a year-on-year basis, said a report by broker firm Prabhudas Lilladher.
“In lieu of fewer launches this festive season, higher secondary market transactions may have caused the spurt in December 2011 sales,” the report says. “However, anecdotal evidence continues to suggest a continued tough time faced by the developers. We would wait for data in the coming months to ascertain if this is a reversal in trend or just a monthly blip,” it continued. In terms of lease transactions, December numbers stood at 8,444, exhibiting a flat growth of 1% year-on-year (down 2% month-on-month).
In the last quarter, some builders deflated prices, especially for new launches. The sky-high prices had repelled consumers, and since Diwali, some offers came with discounts and other add-ons to increase offtake. “When there is no money in the market, the builders have to bring prices down. With no funding, sale is their only way out,” commented a sector analyst.
However, some private equity funds are again investing in the sector, giving hope to the builders. LIC Housing Finance is planning to raise Rs500 crore for its urban development fund, which will mark its entry into the private equity domain.
The fund will be invested in companies developing affordable housing projects like IT parks, SEZ and other allied projects. Omkar Realtors, too, raised Rs250 crore from Red Fort Capital for its Malad slum rehabilitation project.
The other big investment is from IL&FS Private Equity, which invested Rs200 crore to buy 9.36% stake in Indiabulls Infraestate, to develop a project on 8.39 acres of land occupied earlier by Bharat Textile Mills in Lower Parel.
“The premium looks extremely high, given the oversupply in Central Mumbai micro market, coupled with the fact that parking FSI rules have also been modified post the auction, whereby a builder is now required to pay the BMC (40% of unearned revenue) to get additional parking FSI,” the broker report said about the IL&FS deal.
Pankaj Kapoor, MD, Liases Foras, said, “The prices are still very high in the primary market. And if PE funding is available, they will remain high. The new projects may again increase their prices. But if customers stay away from such high prices, nobody profits. And it is tough then to find suitable exit points.”
Multi asset funds claim the benefit of different asset classes by diversifying the investment. But is it really worth investing in these products?
Morgan Stanley Mutual Fund has recently launched an open ended debt scheme—Morgan Stanley Multi Asset Fund. The scheme offers investors two plans—Plan A and Plan B. Plan A offers the investors a debt-oriented hybrid asset allocation with 80%-100% in debt and up to 20% in equity. Plan B will invest in debt, equity and gold exchange traded funds (ETFs). Around 65%-100% of the assets in this plan would be invested in debt and up to 35% will be invested in equity and gold ETFs. The allocation to either equity or gold would not exceed 20% of the net assets.
Plan A will be benchmarked against a customized benchmark comprising 80% weightage to the CRISIL Composite Bond Fund Index and 20% weightage to S&P CNX Nifty. Plan B will be benchmarked against a customized benchmark comprising of CRISIL Composite Bond Fund Index (70%), S&P CNX Nifty (15%) and INR price of gold (15%).
How good is Morgan Stanley’s fund management? Moneylife analysed the performance of earlier schemes of Morgan Stanley—Morgan Stanley Growth Fund, Morgan Stanley ACE fund and Morgan Stanley Active Bond fund. In the one-year, two-year, three-year and five-year period ending 17 January 2012, only two schemes have been able to outperform its benchmark in some of the periods. Morgan Stanley has three debt-oriented schemes, but as they have been recently launched, none have a tack record of more than two years. Though the Short Term Bond Fund has outperformed the benchmark in two of its recent periods, the big question is how the fund management will perform for the Multi Asset Fund which will be overlooking up to three different kinds of asset classes.
Moneylife analysed a few other schemes with a similar asset allocation to that of Morgan Stanley Multi Asset fund Plan B—Religare MIP Plus and Taurus MIP Advantage. In the past one year both the schemes have returned around 8%, which is much below the composite benchmark performance (Crisil MIP Blended Index + prices of gold) of 13%-16%. Crisil MIP Blended Index returned 5% in this period and returns from gold was 37%.
Religare Mutual Fund was the first fund house to launch such an asset allocation product in April 2010, with a scheme called Religare Monthly Income Plan (MIP) Plus that would invest in fixed income, gold and equity. There have been other funds that have been launched with different asset allocations like that of Canara Robeco Indigo fund and Sundaram Equity Plus.
But does it make sense to invest in such schemes? They claim the benefit of different asset classes by diversifying the investment. But seeing the performance of such schemes, one would wonder is it really worth investing in these products. In the case of Plan B, one would be better off investing in bank deposits seeing the returns of such schemes and considering the risk factors and ease of investing. The fund managers take a call on the allocation and realign the portfolio depending on their market expectations. For instance, if equity outperforms, the fund manager will book profits in stocks and put these gains into debt instruments to maintain the asset allocation. But as we can see, taking a call is not as easy as it seems. Only a few fund managers are equipped for the job.
Even if the fund manager does his best and is able to beat the benchmark, it is not clear to us how an investor will decide as to how much to put into a scheme like this, especially when he already has money invested in gold ETFs and/or equity schemes. Is such a scheme meant for conservative investors who have no investment in either equity or gold? Such schemes would only take-off if they are able to meet their objective. Moneylife has covered the issues of such schemes in the past. (Read: JP Morgan Mutual Fund plans open ended hybrid scheme. But how much does one invest in such an offer?http://www.moneylife.in/article/19416.html)
On the day of the listing, 17 October 2011, and the days subsequent to listing, the OCAL scrip was trading in an anomalous fashion, when it shot up from Rs115 to Rs198. SEBI had discovered that OCAL had manipulated its share price by diverting the IPO proceeds through structured layers of middlemen and entities
Onelife Capital Advisors (OCAL) is a Securities and Exchange Board of India (SEBI)-registered merchant banker, portfolio manager as well as stock broker. OCAL as well as Atherstone Capital Markets (ACM), its merchant banker, were barred by SEBI from the participating in the market on 28 December 2011, for glaring irregularities and non-compliance of SEBI regulations.
OCAL raised Rs36.85 crore through an initial public offering (IPO) of 33.50 lakh shares at Rs110 per share. The company planned to spend the proceeds for the purpose of developing its portfolio management business (Rs11.57 crore) as well as setting up corporate offices around the country (Rs8.97 crore). The remaining amount was earmarked for ‘general corporate expenses’, brand building and meeting expenses of the issue.
On the day of the listing, 17 October 2011, and the days subsequent to listing, the scrip of OCAL was trading in an anomalous fashion, when the price shot up from Rs115 to Rs198. SEBI decided to investigate into the matter. The regulator had discovered that OCAL had manipulated its share price by diverting the IPO proceeds through structured layers of middlemen and entities.
Most notably was the fact that the 7.28% of the IPO proceeds went to 80 retail allottees and two NIIs, all of whom shared the same postal addresses as well as shared the same bank branch—Bank of India, Panchnath branch situated in Rajkot. There were also related to each other one way or another. Incidentally, one broker—ANS Pvt Ltd shared the same address, as well. However, investigations are on to ascertain whether ANS Pvt Ltd had any role in this scam.
The company had flouted SEBI regulations for failing to put up a public notice for convening a board meeting it held just after filing the Red Herring Prospectus (RHP) i.e. 21 September 2011 but before the IPO date (12 October 2011). As per regulations, any such events before the IPO must be conveyed to the general public.
Thus without notifying the public, OCAL had convened a board meeting to raise as much as Rs11.50 crore in short-term loans from Prudential Group of Companies, Kolkata, towards obligations to two defunct and non-existent companies namely, Fincare Financial and Consultancy Services (FinCare) and Precise Consulting Engineering Pvt Ltd (PreCons), for availing of their ‘services’ towards development of PMS business. Moreover, after the IPO, an amount of Rs2.5 crore was immediately transferred back to Prudential Group in a circuitous manner. What is shocking here is the director of one of the Prudential Group of companies was arrested by CBI in 2003 for siphoning off funds from Bank of Rajasthan. Further, the entities of Prudential Group were implicated by SEBI in the past, for violations of disclosure and insider trading norms. ACM did not take any measures to follow up on the events of the company post RHP.
When probed further, SEBI found out that FinCare and PreCons, according to the memorandum of understanding (MoU), had “excellent track record”. However, past records show otherwise. FinCare had been punished on 7 February 2011 by SEBI for executing synchronised deals with Sparc Pesticides Pvt Ltd and creating artificial volumes in Jindal Stainless Steel. Further, it found out that PreCon was a ‘bankrupt’ entity without any records filed with ROC (Registrar of Companies) in the last three years. Moreover, when SEBI tried to contact these entities, it found out that the addresses provided by FinCare and PreCons in the MoU, were either locked out, vacant or non-existent. In other words, the addresses were provided out of thin air.
The funds received by FinCare and PreCon, from OCAL, were shamelessly transferred to five Surat-based entities which were not part of the securities business. What is worse was that the bank accounts of most of these Surat-based firms were opened as recently as October 2011 and were closed immediately after the funds were further siphoned out to various other entities.
OCAL had used the garb of loans from and to Prudential Group, which in turn transferred large amounts of money to entities that had bought heavily during the IPO and in the next few days after the IPO, in an apparent act to bid up the stock price. The entities had received funds from “Sardhav Investment and Finance Pvt Ltd” which in turn had received funds through various bank accounts from the Prudential Group.
In a twist to this IPO scam, it was discovered that OCAL indirectly ended up receiving funds from another IPO scamster, RDB Rassayans, through an entity called Namokar Duplicating Pvt Ltd who in turn financed Prudential Group, to the tune of Rs7.06 crore. Incidentally, RDB Rassayans is the seventh and final company in the IPO series being covered by Moneylife.
The chart below illustrates the manner which the IPO proceeds were diverted by OCAL (Source: SEBI)
A part of the IPO money was brazenly diverted to friends and group companies of OCAL and its promoters. The amount of Rs7 crore which was supposed be paid to Masala Gruh Properties Pvt Ltd for setting up a corporate office was cancelled after the filing of the RHP and, instead, paid to FinCare for the same purpose. FinCare then diverted the Rs7 crore Onelife Gas & Energy Infra Ltd and Shalini Patildar, who was a friend of OCAL managing director, Pandoo Naig.
Incidentally, Mr Naig had received a tax notice of Rs17.58 crore, and the same was mentioned in the prospectus under the ‘Risk Factors’ section. However ACM failed to query this aspect and instead signed off the prospectus as though this was not a big deal. Why such casual behaviour?
Prior to the issue, the promoters of the company boosted OCAL’s net-worth from a mere Rs1 lakh to Rs10 crore, within a space of three years. While this is legal, it is alarming to note that they had possibly misappropriated company money for their own benefits by transferring the same funds brought by them to separate entities owned by them. ACM hadn’t ascertained the genuineness and motive of these transactions. If we take this into consideration, the net-worth would be less than Rs10 crore thereby rendering OCAL ineligible for IPO.
SEBI has ordered OCAL to recall all the IPO proceeds it had diverted to FinCare and PreCons, and deposit the same into an escrow account. As usual, the investors will not be getting back their hard-earned savings.