New Delhi / Mumbai: The stock market regulator sharply tightened disclosure norms for real-estate companies that want to raise money through shares, effectively putting an end to unsubstantiated claims about the extent and valuation of so-called land banks that these companies were sitting on.
The move by the Securities and Exchange Board of India (Sebi) came along another significant decision that makes it mandatory for all initial public offerings (IPO) to be rated by agencies. “The grading of IPOs will come into effect immediately,” said Sebi chairman M. Damodaran. Among the other measures, the listing guidelines will be amended to allow companies to send abridged annual reports to its shareholders.
As for real-estate companies that planned to raise money on the stock markets, the regulator said these firms will have to disclose their land-bank details and these details should be accompanied by ownership status or an agreement to purchase land.
Damodaran also said that such firms should project the valuation of the land bank on the basis of the land’s present value and not any future price appreciation.
Sameer Kamdar, country head of Mata Securities India Pvt Ltd, said the regulator’s decision was timely and important. “I think the entire real-estate story was turning into one big bubble,” he said. Rishi Sahai, a board director IndusView Advisors, a real-estate investment advisory firm, said the new rules align the domestic real-estate sector with international best practices.
Real-estate companies were slated to raise Rs16,000 crore in 2007 through IPOs, some 35% of the Rs45,000 crore that was expected to be raised through about 150 new listings. In 2006, real-estate companies raised about 20%, or Rs4,000 crore, out of nearly Rs20,000 crore raised from the public by about 73 companies.
Sahai said he expects the regulator to go back to developers who have already filed for permission to launch IPOs and ask for more information before granting approval. “It will ensure transparency in the marketplace,” he said.
Auditors in India aren’t used to validating land-bank valuations and they might not be the best people to do that, said Joy Jain, executive director, PricewaterhouseCoopers India. It might make more sense to ask for valuations by two separate companies, which would both have to be disclosed to investors, he said.
“The point is that it is extremely difficult for an auditor to comment on land valuation because it fluctuates on a day-to-day basis,” Jain said.
Jones Lang LaSalle country head Vincent Lottefier said the scale of the valuation depends on the client’s needs. Clients sometimes ask for nothing more than a “desktop valuation”, a number-crunching exercise that is done without site visits and is not as accurate as a more comprehensive approach.
Valuations also vary depending on what is being evaluated. Sobha Developers Ltd, which has a market capitalization of Rs5,805 crore, included in its IPO report this summer a valuation from Cushman & Wakefield for its 2,593-acres land reserve.
The net present value of the land was between Rs7,036 crore and about Rs7,776 crore. Delhi-based Omaxe, which filed a draft plan for an IPO in December, hired Trammell Crow Meghraj to evaluate the value of its projects, including the land they would be built on. The value of the 2,837 acres of projects, which were either planned or under development and takes into account income potential, was Rs19,701 crore.
But not all real-estate companies have listed their land-bank valuations as part of their effort to raise public money. DLF Ltd, which is planning one of the most anticipated and biggest IPOs this year, doesn’t have a valuation for its land bank in its latest draft IPO regulatory filings.
“It has not included any valuations, purely due to the fact that valuations can be extremely futuristic,” said Rajeev Talwar, DLF’s group executive director. “Bankers may make their own valuations. We support this (Sebi) move and if there is any further information called for, we would only be too happy to comply with it.”
Prithvi Haldea, managing director of Prime Database, said the move comes as real-estate companies are just starting to enter capital markets, noting that the listed ones constitute under 2% of all market capitalization.
“The tightening of disclosure norms is good as bad companies that spoil the market can be weeded out,” Haldea said.