Real estate valuations are opaque and the government had openly supported the sector after the financial crisis. The current real estate scam is the outcome of these two factors, say experts
The arrest of eight officials from public sector banks and financial companies for allegedly taking bribes to sanction loans to realty firms, has drawn attention to one of the key factors that has led to this real estate scam: Opaque valuation methods that allow artificially high valuation of properties, making it possible to go for such improper loans.
"It's not just a matter of involvement of public sector banks or mediators; the system of real estate valuations is the crux of the scam," said Pankaj Kapoor, CEO & founder of Liases Foras, a real estate rating and research firm. "I think the Central Bureau of Investigation (CBI) got involved in the matter because there could be risky securities on which loans have been given. For instance, a property which should have a value of Rs150 crore is being projected as worth Rs500 crore. That becomes the security on which a bank gives loans and is where the risk comes in," Mr Kapoor told Moneylife. The real estate sector is the least transparent of the large business sectors. Developers are always keen to get huge finances on artificial valuations on their properties as the industry is unregulated.
Officers in the top management and middle management of Bank of India (BoI), Central Bank of India (CBoI), Punjab National Bank (PNB), Life Insurance Corporation of India (LIC) and LIC Housing Finance were receiving illegal gratification through a private financial services company, acting as mediator and facilitator for corporate loans and other facilities from these institutions, the CBI said in a statement.
"As of now, the name of only one arranger (of the loans) has come out, but I think there would be small and big arrangers in the industry," Mr Kapoor said.
Being an unorganised and unregulated industry, not just big but small developers too in major cities try to value property rates to their advantage. It is left to diligent banking officials to give loans against valuations that are realisitic. "There were pressures on the PSU banks to give more and more loans to developers," explained Mr Kapoor.
As a fall-out of the LIC Housing scam "there will be repercussions in terms of increased caution by banks in lending to developers. Borrowing will become more expensive and the process involved in getting loans will get lengthier as banks increase their vigilance levels. This means that we may see a marginal increase in the dependence on private equity," said Anuj Puri, chairman and country head, Jones Lang LaSalle India.
Experts have been expecting a sharp fall in property rates since last year, when other industries were crippled in the recession; but property rates did not come down significantly as developers continued to get funds from financial institutions.
"In the period of the recession, when real estate prices had to come down significantly, why did the government ask PSU banks to give loans to the real estate sector? Now we are suffering the effects of that decision. This year we have crossed another peak in real estate rates because the government allowed further infusion of funds in the real estate industry," Mr Kapoor said.
Rohtak (Haryana): India today ushered in Mobile Number Portability (MNP) that will allow cellphone users to switch operators without changing numbers, with telecom minister Kapil Sibal launching the service in Haryana, reports PTI.
The rest of India would get to use MNP from 20th January, next year.
The consumer friendly service was mooted over two years ago and was planned to be implemented by end of 2009. However, the implementation had to be deferred several times owing to reasons ranging from lack of preparedness of operators to delay in appointment of an agency to oversee MNP execution.
MNP would bring in a much-required change in the quality of services as well as attitude of the operators towards redressal of grievances in order to retain subscribers.
As per the eligibility criteria, there should not be any outstanding payment by way of pending bills before customers can apply for availing of MNP services, the Department of Telecom (DoT) said.
It also said that the mobile number sought to be ported should not be sub-judice and also there should not be pending request for change of ownership of the mobile number.
The DoT has claimed that the entire process of switching operators would take a maximum of seven days and subscribers may face disruption of services for about two hours during that period.
The one-time charge that needs to be paid by subscribers would depend on operator-to-operator, but the charge cannot exceed Rs19.
Any mobile subscriber must have used the number for at least 90 days before availing of MNP service.
India has more than 700 million subscribers across the country with nearly 10 operators in each circle.
India Infoline, which arranged to transfer Rs446 crores from four hapless foreign institutional investors (FIIs) to Money Matters Financial Service, clearly did not do the due diligence on the company while pocketing fat fees
Yesterday, Moneylife was the first to report that the Central Bureau of Investigation (CBI) was questioning Money Matters officials in a multi-crore scam (Read: 'Money Matters Financial raided by Central Bureau of Investigation' at http://www.moneylife.in/article/4/11505.html). We pointed out how Money Matters had managed to raise over Rs4,460 million from four foreign institutional investors (Morgan Stanley, Wellington, Fidelity and GMO) just a month ago, through a Qualified Institutional Placement (QIP) that was brokered by India Infoline (IIFL).
We gather that investors are incensed that IIFL did a shoddy job of the due diligence while making the QIP. FIIs are privately accusing IIFL of ignoring malpractices by Money Matters and pocketing merchant banking fees.
However, IIFL is arguing that it was not aware about how Money Matters really functioned, or the scam in the company. But this rings hollow. Moneylife has come across an IIFL report on Money Matters that was issued just four days before the scam was revealed. The report is a very positive one.
We also gather that IIFL is now arguing that it hasn't been able to communicate with the four QIP investors since the scam broke. One can be pretty sure that its phones are ringing off the hook with angry clients bent on discarding the broker from their empanelments. Indeed, angry FIIs have sold the stock heavily today. It was down 14.83% on the National Stock Exchange.
This raises the question as to why merchant bankers should be allowed to collect fat fees for issues if this is the level of due diligence they offer? And why such a poor job on the due diligence should not be punished with the imposition of standard stringent fines, and suspending such entities from the market for some years at least?
It is very clear that either IIFL did not do the due diligence which it claimed it had done, or it did it so shoddily that it was not aware of how the company really functioned. For, it helped raise $100 million for Money Matters through a QIP concluded on 20th October. Just a month later (in a report to institutional clients dated 22nd November), IIFL encouraged clients to buy the stock for a 24% upside. The IIFL report says: "Money Matters Financial Services (MOMF) is a niche player in loan syndication with strong origination and distribution capabilities, as evidenced by its volume of throughput and client roster. We believe the company is well-positioned to capitalise on strong demand for syndication over the medium-term, arising from large investment needs of the corporate sector, while its lending operations provide an added boost to earnings. We expect MOMF to deliver EPS CAGR of 33% over FY10-FY13, driven by a rise in syndication volumes, stable fee level, and high spread from down-selling."
The report contains a large graph detailing the process that Money Matters follows for debt syndication and it claims that the "internal process reveals a complex web of processes, requiring client handholding by the syndicator at every step of the process."
The IIFL report says that MOMF placed Rs440 billion of loan/debt during FY09-FY10 across various sectors. The company's debt syndication activity is principally concentrated in capital-intensive industries such as infrastructure, power, real estate and financial services. MOMF derived 88% of its consolidated revenue in FY10 from loan and debt syndication and loan restructuring activities and the rest from securities trading, lending and equity and debt brokerage.
MOMF's key competitors include banks with strong debt syndication capabilities, primarily SBI Caps, Axis Bank and YES Bank. The company has a well-established team of over 100 professionals for origination and placement activities, with strong corporate and institutional relationships. On the other hand, the company has seen considerable attrition at the senior management level during FY10.
MOMF had 9 million shares outstanding end-FY08. In FY09, the company undertook a rights issue at par, offering two shares for each share held, raising Rs180 million. In addition, stockholders were given one warrant for each new share, aggregating to 18 million warrants. The warrants were exercisable at a 20% discount to market price up to September 2010. Subsequently, the subscription period was extended to March 2014.
The management gave up its share of warrants in the third quarter of FY10, so currently there are 3.7 million warrants outstanding. MOMF undertook the QIP in Q3FY10 and raised Rs4,450 million, which it proposes to use for lending purposes. MOMF plans to capitalise on its client knowledge and flexibility vis-à-vis large banks, to provide loans to client where a regulatory arbitrage opportunity exists. The company eventually plans to sell down these loans to banks, to capture the spread.