Production capacity constraints will keep inflation higher, says Nomura

Nomura expects manufacturing to start growing again in the second half but this would be timed with capacity constraints leading to higher inflation

India’s business cycle has bottomed and inventory restocking, an export revival and investment debottlenecking should lead to a cyclical recovery in industrial production. This is according to Nomura’s analysis of the situation in manufacturing on an all-India basis. Nomura’s concern is that this will happen at a time when realisable capacity is even smaller due to persistent shortages in power and basic raw materials. 


According to the Reserve Bank of India’s (RBI) Industrial Outlook Survey, capacity utilisation bottomed out in Q3 2012 and a greater percentage of manufacturers expect capacity utilisation to increase in Q4 2012 and Q1 2013, reversing the downtrend seen since Q2 2011. 


In Nomura’s view, this demand-supply mismatch will lead to manufacturers exerting pricing power. Hence, the brokerage believes that the expected moderation in core (non-food manufactured) WPI inflation in Q1 2013 will be unsustainable, and that it will begin to rise from Q2 2013. This is one of the reasons why Nomura expects the RBI to remain on hold in 2013, after delivering a 25 basis points cut in May 2013.


Are pre-launch offers from developers illegal?

Cash-strapped developers are coming out with pre-launch offers that were reserved for a closed group. This is in violation with the provisions of the MOFA and yet developers are flouting the rules and regulations in the absence of any check from the authorities

Several developers are coming out with pre-launch offers through advertisements and special invitations. However, according to experts this is completely illegal as developers are selling apartments even before the grant of the licence to develop the property.


"It (pre-launch offers) is a big zero. Pre-launch offers are 100% illegal. Unless you pass the plan (for the building) you cannot allocate flat or apartment number to a buyer. And several developers are found doing the same,” said advocate Vinod Sampat.


He said as per the Maharashtra Ownership Flats (Regulation of Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA), it is clear that developers cannot do this (pre-launch offerings). “There is no provision in the law that before obtaining clearance for the plan, a developer can launch a project. However, developers both big and small, across the country are using this method,” Adv Sampat said.


According to Pankaj Kapoor, managing director of Liases Foras Real Estate Rating & Research Pvt Ltd, this (pre-launch offers) is not good for a fair and balanced market. "People are lured to invest into such properties and it needs to be stopped. This practice spoils the market. Even in terms of parity, the price in the pre-launch offers is not lucrative. This is deception and should be stopped. I hope the new regulatory bill may stop this practice,” he said.


With higher interest rates and restrictions from the Reserve Bank of India (RBI) on lending to the real estate sector, several developers are using pre-launch offer route to fund the project. While welcoming the RBI’s decision to cut repo rate and cash reserve ratio (CRR) by 25 basis points, the Confederation of Real Estate Developers’ Associations of India (CREDAI) has called for a special thrust on realty sector. “The developer community expects key initiatives and boosters like according the status of infrastructure to housing and reducing the risk weightage to 1 from 1.25,” said Lalit Kumar Jain, president, CREDAI.


According to an expert who does not want to be quoted, developers buy the land and then announce pre-launch offer without taking any prior approval for the development plan. “Earlier, this was reserved for a closed group of people or associates of the developers. However, now days, everybody is coming out in the open with the pre-launch offer. The main reason is without a plan approval, the developer cannot obtain funding from legal sources and then opts for such route for financing the project,” he said.


Cautioning investors and buyers about such pre-launch offers, the expert said, since majority of developers only give an ordinary letter and there is no contract involved, in case of any dispute, the buyer stands to lose.


Several big developers like Lodha, Unitech, DLF, Godrej Properties, L&T Realty and Indiabulls are among those who are actively pursuing this model. Exploiting the anxiety of missing out that the phrase “first come first served” generates in the minds of buyers, the Lodha Group claimed that last month it received “tremendous response” for its Worli property.


Another interesting gimmick used by the Lodha sales team was the price rise. Following the pre-launch of its Blue Moon project, Lodha has also announced that the launch price for the project will be at least 20% higher that the “pre-launch offer”. This is surprising, as just a few days ago, Liases Foras, in its third quarter review of the residential market, had said the price of new launches was 24% lower than that of the existing supply across India, indicating signs of correction and increase in affordable housing. However, buyers are made to believe that real estate prices would only go up and this is the right time to buy the property at discount.


The Union government is planning to table the much awaited Real Estate Regulatory Authority Bill in the budget session of the Parliament. Ajay Maken, minister for housing and poverty alleviation, expects the Bill to reduce prevailing rampant corruption in the real estate and housing sector. “Not only will it (the Bill) protect the rights of home buyers, it will also bring in greater transparency. Developers will be restricted from channelizing funds collected from customer for one project to another one, which will provide better security to the home buyers’ investments. Even the property agreement documents, which are prepared and executed by the developers, will not remain one-sided, thereby not favouring the developer alone,” he said, while speaking at a conference in Mumbai.


The Union minister is also contemplating providing “infrastructure sector” status to the affordable housing segment, which will enable banks to come forward for providing loans to urban poor and provide an unprecedented boost in this segment. The banks will be able to provide long-term loans and also with the change in industry status, the ratio of non-performing assets (NPAs) from this category will reduce.


One thing is clear, despite a clear provision in the MOFA, developers are coming out openly with the pre-launch offers. And this is mostly due to inefficient checks from the authorities. Haryana is among the states which not just banned pre-launch offers from developers, but also have rules in place to prosecute people involved in such cases. However, developers are openly flouting the ban and rules and advertising properties even without getting requisite approvals.


Haryana’s Department of Town and Country Planning, in an advisory had said that certain unscrupulous persons and companies may indulge in illegal activities of “pre-launch” of plots without obtaining a licence for development of such colonies. It also advised buyers to contact the department and verify whether licence has been granted to avoid any legal problems and financial implications.



Vishwas Datar

3 years ago

There should be One Certificate to be issued to Developers/Builders by the Approving Authorities like MUnicipal Corporation of Greater Mumbai's Building Proposal Department or UD Department of Govt. of Maharashtra such as " Booking Certificate ". This certificate shall be issued only after Developer/Builder has got approval to the Project and complied with all required conditions. This Booking Certificate shall be so widely advertised to create awareness in Buyers that while booking any flat they demand for this Booking Certificate issued by Competent Authority and feel assured of Transperancy.
Architect V.K. Datar


4 years ago

Our regulators have no real experience of how fund flows and commerce work in real life. They need a basic course in investment finance.

There is nothing wrong in what the builders are doing. They are raising SEED financing. Seed financing is the riskiest since financing happens at the ground floor level. Then with the money the builder undertakes further regulatory clearance and due diligence for the project. Sometimes the SEED money goes awash since there are more problems in the property and seed investors lose everything. This is more of a venture financing with 100% loss of capital. OUR LAWS MUST RECOGNISE THIS.
Then comes mezzanine funding once the project stabilises and construction begins. Once construction happens further then the Series A funding happens. All progressive rounds are higher in valuation and price since the risk of the project is removed. Eliminating the Seed level funding is incorrect since where will the builder raise funds which are so risky in the beginning? The builder currently does the seed funding himself and bribes his way through the corrupt system to save his capital (haft for his capital protection). Have a seed round level and watch the mispricing go away. Always the seed investors get the highest return on capital since they have taken the maximum risk. Furthermore, use a company to pool funds for each project. Let there be investment vehicles. Currently our Companies Act is not friendly on investment vehicles which is why buddy networks exist in real estate financing at seed round where trust runs high. Somewhere our lawmakers have failed on this.



In Reply to Naresh 4 years ago

For once a balanced educated response. Great!

Odisha government has resorted to hasty, coercive action to evict thousands of villagers: EAS Sarma

EAS Sarma has made an appeal to the state government to close the doors to POSCO permanently and act as a genuine representative of the people who have elected them to head the government today

EAS Sarma, former secretary to the Government of India (GOI) and resident of Visakhapatnam, has condemned the forcible eviction of villagers at Balitikra along Govindpur-Nuagao border in Odisha for the POSCO project. He says that it is illegal and involves violation of human rights. He has made an appeal to the Odisha government to stop it forthwith.


From visual media reports and other sources, it is evident that Odisha government has resorted to hasty, coercive action to evict thousands of villagers, including women and children, near Balitikra along the Govindpur-Nuagao border, with a view to accommodate the interests of POSCO. Such action violates the human rights of the villagers and defies the basic norms of democratic governance.


EAS Sarma clearly points out, “The latest coercive action unleashed by the state government represents the culmination of crony capitalism that seems to characterise both the Centre and the states. The mining franchise is under suspension. The environment clearance has been held invalid. However, the state government seems to side the foreign company rather than its own people.”


The story of POSCO is the story of how low can our country’s leaders stoop in order to promote crony capitalism of the worst kind. To the best of our knowledge, the selection of POSCO was through a highly non-transparent process that raised questions on the propriety of the state government in granting permissions to the foreign company. What followed thereafter was highly predictable in today's environment of the close nexus between the politician and the businessman.


The arguments put forth by EAS Sarma are as follows: First, The PMO (Prime Minister’s Office) and MOEF (ministry of environment and forests) acted in an orchestrated haste to throw all the environment norms to the wind and accorded environment clearance for POSCO. Second, under civil society pressure, the then Union minister of state for environment & forests appointed a committee to examine forest rights violations and other statutory infringements involved in the clearances given in favour of POSCO but he chose conveniently to reject the recommendations of the majority of the members of that committee and accept the report of the minority member to uphold the environment clearance for the project. Finally, it was the National Green Tribunal (NGT) that overturned the action of MOEF and quashed the environment clearance for POSCO. NGT ordered a fresh appraisal of the project.


Despite this, the local political leaders and the officials continue to act for the foreign company, forgetting that they are accountable to the Constitution, the law of the land and the public at large.


While some ‘expert’ institutions tried to exaggerate the benefits of the project to justify the remuneration they had received from the project proponent, an independent evaluation would show that the social costs of the project far exceed the social benefits. Both the central and the state governments have chosen to close their eyes and work for POSCO!


An independent investigation by the CBI under judicial oversight will unravel the numerous improprieties that were committed at different stages of pushing through this project.


EAS Sarma has made an appeal to the state government to close the doors to POSCO permanently and act as a genuine representative of the people who have elected them to head the government today. The Union government should review its own stance on POSCO and on its mis-conceived approach to ‘development’ in general and persuade the State to respect the Constitutional rights of the people, the law of the land and the basic dignity to which the citizens of this country are entitled.


EAS Sarma concludes by saying, “We hope that good sense will prevail over the minds of our rulers even at this belated stage and they desist from unleashing state violence against men, women and children living in the area.”


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