Mumbai: This is the story of a unique deal involving a builder, a bank that no longer exists, the portfolio management arm of a brokerage and few wealthy Indian investors.
WDC Ventures Ltd, an investment arm of Wachovia Bank of the US, has recently sold its 49% stake in Mumbai-based Vijay Associates (Wadhwa) Constructions Pvt. Ltd for Rs185 crore. WDC Ventures’ stake was bought back by Vijay Associates in a deal structured by India Infoline Ltd and funded by some wealthy individuals, clients of India Infoline Private Wealth Management Ltd, the Mumbai-based brokerage’s portfolio management services arm. Its non-banking finance company (NBFC) India Infoline Investment Services Ltd is also involved.
Wachovia is now a Wells Fargo group firm. US lender Wells Fargo and Co. took it over in 2008 after it was hit hard by the global credit crisis.
WDC had invested in a handful of realty firms since it set up shop in India in 2006. Vijay Associates is one of them. Another is Vipul Ltd, in which WDC invested Rs234 crore for a 14.95% stake.
Vijay Associates is a special purpose vehicle formed by Mumbai-based builder Wadhwa group that has developed many properties in Mumbai, Navi Mumbai and Pune.
Vijay Associates has development rights to build four 44-storey residential towers in a plot at Oshiwara, a western suburb of Mumbai, owned by Brihanmumbai Electric Supply and Transport Undertaking (BEST). Two out of these four towers are in advance stages of construction. Luxury apartments of these two towers are being sold under the brand name Wadhwa Imperial Heights, while work is yet to begin on others.
In end-May, Vijay Associates made a private placement of debentures worth Rs182 crore. These debentures were jointly subscribed to by India Infoline Investment Services, the non-banking finance arm of India Infoline, and India Infoline Wealth Management, the portfolio manager.
India Infoline’s investment banking division has structured the deal; its non-banking arm funded as well as acted as a warehouse for these debentures; its wealth management and financial distribution arms helped in selling these to investors.
By being the agent of this issue, the non-banking arm had the flexibility to directly subscribe to the debentures as well as on behalf of others. Subsequently, the portfolio manager has been selling these debentures to its clients who are interested in the 16% returns promised by the issuer, Vijay Associates. The minimum investment in these debentures is pegged at Rs50 lakh. Each debenture has a face value of Rs1,00,000.
An email circulated by India Infoline’s wealth management arm says: “As part of the lending activities by our NBFC arm, we are financing Vijay Associates to the tune of Rs450 crore.”
An attachment to this mail, reviewed by Mint, states that Rs185 crore out of the debenture issue proceeds would be utilized by the firm to buy back the stake owned by the private equity firm.
Sandip Kundu, director, real estate, at WDC and now managing director of Wachovia, declined to comment for this story, saying, “We will not be able to speak or communicate anything on any of our investments due to confidentiality clause with our partners.”
Nirmal Jain, chairman and managing director of India Infoline, said the debenture issue is a form of “co-investment product” which was offered to the wealthy clients. “These clients are smart and are making investments after fully going through structure and risks involved.”
Paresh Varma, head of finance, Wadhwa group, said the issue is being managed by India Infoline. “There will be different series of this placement. As and when they get subscribed, we will get the money. We have got the the first series money of Rs182 crore.”
Umang Papneja, head of products in the wealth management arm, said the debentures are an innovation in the securitized lending space. “Investors seem to be interested in these products as these are asset-backed and they are happy with the interest rates being paid out.”
According to Indian capital market regulator’s norms, any issue of capital to 50 persons or more is considered a public issue and such issues, both debt and equity, are governed by stringent disclosure norms.
It is not known how many individual have invested in these debentures.
“We have not seen the need for more than 49 investors. We do not sell it to small investors,” Papneja said.
A senior official with the wealth management business of a foreign bank said he has come across a few other instances of real estate developers raising money through these instruments.
“Many wealth managers have structured and sold these collateral-backed instruments for real estate firms. Typically, these instruments offer 16-18% yield. But since the income is fully taxable, the investor would get a post-tax yield of around 10%,” he said on condition of anonymity.
The collateral is a mortgage on the land holdings or development rights of the builder.
Relatively smaller realty firms are resorting to floating these instruments as there are not too many avenues to raise money.
The banking regulator is strictly monitoring banks’ exposure to this sector and institutional investors are willing to give money only to the front-line developers.
Kanwar Vivek of Aditya Birla Money Mart Ltd, a wealth management arm of the Birlas, is not willing to recommend such risky products to investors. “We keep away from such instruments,” he said.
According to Vivek, wealth management firms and realestate companies at times join hands to generate liquidity when property sales go down.
He cited examples of wealth management firms tailoring instruments where in wealthy investors would get rental yield-based returns till such time a property is sold.
“This seems an evolved version of those deals,” he said.