After a 4% rally in the Standard Chartered stock on the LSE yesterday, FIIs rush to cash in on a possible arbitrage opportunity
The Standard Chartered IDR issue, which was floundering with a negligible response from investors, was rescued by foreign institutional investors (FIIs) on the very last day. But it is likely that the FII interest had more to do with the arbitrage opportunity created by the stock’s rally on the London Stock Exchange (LSE).
FIIs have finally bid for 22.94 crore shares in the Standard Chartered IDR issue, after a 4% rally on the LSE yesterday. The stock was up 4.41% at £16.80 yesterday on the LSE.
At the time of writing, the Standard Chartered stock was trading at £16.62 on the LSE. In Indian currency, keeping in mind the stock movement on the LSE, one IDR is equivalent to Rs113. Ten IDRs represent one share. Sources say that FIIs have bid for the IDRs at Rs104. If the IDRs are listed at a premium, then it would be a double bonanza for them.
The retail investor quota was subscribed 0.13 times while the employee share was subscribed 0.12 times. The QIB portion was subscribed 4.14 times. Overall, the issue has been subscribed 2.20 times.
“Yesterday the market went up substantially in London. The Standard Chartered share rallied to Rs1,142.40 (in rupee terms). People were looking for arbitrage. A lot of FIIs came in, which no one was expecting. Since it’s a follow-on offer, FIIs take a call on the last day,” said a top official from an investment banking firm.
Retail investors have been given a 5% discount in this issue. The issue opened on 25 May 2010 and closed today. The IDRs will be listed on 11 June 2010. The IDR issue opened with a lukewarm response from investors. The issue was subscribed 11% yesterday.
The IDRs have a lock-in period of one year before they can be freely convertible into shares.
Life insurance companies are not allowed to invest in the IDR by IRDA.
Suhas Mantri, proprietor, Mantri Constructions, speaks to Moneylife on his book, ‘The Comeback’, based on the working of the real-estate industry, and also looks at where the industry is heading. The book is a story on the bankruptcy and survival of a real-estate company
Moneylife (ML): The book is a work of fiction, but according to industry sources, it is a mirror of your life. What are your views on it?
Suhas Mantri (SM): The first part of the book is fiction, events that are taking place in many family-run businesses. The second part—that is, the turnaround story of the company—is a real story. Overall, if we look at the book, it represents stories of many corporate houses. I receive calls from founders of various corporate houses who feel that the book talks about their story.
ML: The book has a fictitious entity, ‘Mehta Housing Ltd’, which took the route of an initial public offering (IPO) to grow rapidly in the real-estate industry. Do you observe the same thing happening now as most developers are rushing towards IPOs—failing?
SM: It is not about rushing towards an IPO. The real-estate industry is a cyclical industry which undergoes a slowdown after a certain period of time. It becomes difficult for a company to give the best performance when it is listed. The management worries on the financial numbers rather than concentrate on other factors like quality, delivery and initiating new constructions.
I believe there is always an expectation from a listed company to report better revenues compared to a previous quarter and this creates problems for it in the future.
ML: The book talks about the bankruptcy and survival of a fictitious real-estate company. What according to you are the key measures that a real-estate company should take to ensure its long term survival?
SM: The main reason for failure of realty companies is the lack of working capital for under-construction projects. Most real-estate companies emphasise on creating a land bank rather than concentrating on the progress of construction. According to me, (the concept of a) land bank is a myth. Huge amount of money gets blocked in buying land. If a developer has sufficient funds for a particular period (for example five years) only then should he think of creating a land bank. Otherwise, a company should concentrate on keeping ample working capital aside.
ML: To get funding for projects is an issue for most developers. Many of them are offering 'guaranteed returns' on their properties because it is difficult to raise funds either through the markets or financial institutions. What can developers do in such a scenario?
SM: Such a scenario only arises if the company focuses on creating land banks and neglecting its core business—construction. If the company concentrates on construction and on delivering the project on time, then I don’t think there will be any issue with the funding for projects. Instead, if the company holds on to the land and waits for the land value to appreciate, then it would create problems for the company when it wants to raise funds.
ML: The book explains, the ‘7 step pyramid’ followed by Mehta Housing to come out of the crisis; will you suggest those steps for all real-estate firms?
SM: The ‘7 Steps’ suggested are not only for the real-estate industry, they are applicable to all individuals. It applies to all businessmen, professionals and each and every individual including housewives. Some simple steps mentioned in the pyramid are: Assess your spending; take financial protection, if required, to invest your savings in different places where you are confident of returns and bring down all your non-performing assets.
ML: The realty industry has a number of family-run businesses. What will be your advice to the promoters of such companies?
SM: In a family-run business, each individual should be handed over some responsibility so that he/she can be accountable whenever required.
ML: How do you see the real-estate industry doing in the next two years in Mumbai and Pune?
SM: For the next couple of decades, the real-estate industry will move in the upward direction. However, the real-estate industry is a cyclical one and undergoes a slowdown every three to four years. But the long-term prospects are really dynamic.
ML: Prices of properties are shooting up, do you think prices will increase in Mumbai and Pune or will they stabilise?
SM: The prices in the real-estate industry depend on two factors—the cost of land and the cost of raw material. For example, a few components of real estate like direct/indirect taxes, development charges and sanction charges (among others) contribute a major percentage to the increase in prices of properties. The charges for these components increase approximately by 10% to 15% annually. Hence, real-estate prices will definitely go up in the future.
The Siddhi Group—that developed Lake City Mall in Thane—is asking shop owners to sign a no-objection certificate so that it can lease the space to corporates
Thane-based developer Siddhi Group Developers (earlier known as Shree Balaji Builders and Developers) is in the process of scrapping part of its ambitious mall project and wants to convert this space into a corporate park. The developer is asking all people who had bought space in that particular section of the mall to sign a no-objection certificate (NOC) allowing it to lease the space to corporates.
Balaji Builders opened booking for its Lake City Mall in 2004. The mall has a total area of 5.5 lakh square feet (sq ft). Many people with a dream to own a shop in a big mall invested huge amounts and even paid as much as 90% of the total amount at the time of booking. The mall was planned to be built in two parts, block A and block B. It was expected to be ready in two to three years. However, the project was delayed beyond that due to slow construction activities.
Big brands such as Big Bazaar and McDonalds were the first to receive possession and open their shops at the Lake City Mall. However, due to delay in completion of the rest of the mall, no other big brand was interested in opening shop there. In the meantime, the developer also changed its name to Siddhi Group from Shree Balaji Builders and Developers.
Now, after taking about six years to complete the project, the developer wants to convert the remaining part of the mall into a corporate park citing slowdown in the retail industry as a reason. The Siddhi Group has been asking people who had booked shops in block B to sign NOCs so that it can lease the space to corporates. It is promising to give a minimum of Rs50 per sq ft on carpet area as rental income to shop owners. This is unacceptable to shop owners who had invested money in the property. They feel that the builder may earn more than Rs100 per sq ft as rental income from corporates but will give only Rs50 to the shop owners.
At present, the area around the mall attracts an average rate of Rs70 per sq ft for commercial office space. In addition, there is no mention of any timeframe in the NOC, which may make it difficult for the shop owner to take back possession of his property. The developer has also kept mum on matters like who will sign the lease agreement and what would be the period.
One such person Ram Mohan (name changed) had bought two shops on the ground floor of block B by paying about 90% amount of the agreed price. He is eager to open his shop in the mall. However, the Siddhi Group wants to divide block B into two parts, with about 25% area converted into a business centre and remaining 75% as a retail section.
According to sources, the builder has already started booking of the business park space without informing the shop owners. It has also blocked the 25% area. Unfortunately, Mr Mohan's shop falls in this section. He is not happy with the promised returns from the builder. He says, firstly the rate of return on his investment comes to just 0.5% per month or 6% per annum that too after a 'lock-in' period of six years. This is when he would have earned more money as pure interest income from his investment, deposited in a bank.
However, with the Siddhi Group forcing shop owners to sign the NOC, is there any option left for Mr Mohan? We asked some legal experts. According to Vinod Sampat, advocate and founder, Vinod C Sampat and Co, "If the builder does not keep up to his commitments, the owners of the properties have various methods to get the place—like issuing a legal notice, approaching a consumer court, criminal court and also police authorities.”
The claim of a slowdown in the retail industry by the Siddhi Group is also doubtful, especially looking at the higher number of footfalls in Big Bazaar and McDonalds. Even the change in infrastructure and the competing market of Thane has caught the interest of other big players like the Raheja Group and the Runwal Group. Both of them have launched KORUM and R-Mall, respectively in the city.
Officials from the Siddhi Group were not immediately available for comments. Despite calling their office several times throughout the day, we were told that the concerned officials “were in a meeting.”