A head of what is widely expected to be a milestone initial public offering (IPO) in India’s booming real estate market, DLF Ltd’s revenue and profits have been sharply boosted by sale of its properties to an entity promoted by some key shareholders.
In its filing with the stock market regulator, whose approval is needed to proceed with a share offering, DLF said its profits during the eight-month period ended 30 November 2006 rose 853% to Rs1,830 crore from about Rs192 crore in the full 12 months of 2005-06.
The filing with the Securities and Exchange Board of India, dubbed a draft red herring prospectus, shows that 75% of the real estate giant’s pre-tax profit, about Rs1,742 crore, came from sales to DLF Assets Pvt Ltd. Some 65% of DLF’s revenue for the same eight months was accounted for by the same sale of assets. Because DLF is currently a closely held company, figures beyond November were not available. As stock market regulations don’t allow a company seeking approval for an IPO to make public comments, DLF executives said they were unable to comment on the transactions or any related matters.
It is usual practice for companies in many industries to streamline operations and thus boost revenues and profits ahead of an IPO. Although DLF’s sale of properties to DLF Assets reflects a new business model at least in terms of other major real estate players in the country, it is in keeping with accounting principles and company laws.
“For showing higher profits, they have sold some of their commercial properties to one of the companies owned by the promoters,” said Siddhartha Gupta, a real-estate analyst who tracks the Indian real estate sector for Macquarie Securities, an Australian investment bank. Gupta said DLF has started selling office properties it previously held for rental income.
According to two bankers familiar with the DLF transaction who did not want to be named, the company transferred ownership of five office properties to DLF Assets, an 11-month-old company owned by DLF chairman K.P. Singh, his family and other associates.
Pradeep Jain, chairman of Parsvnath Developers Ltd, another real estate firm, said his company sells its developed properties directly to users and not to any promoter-owned entity. A spokesperson for Unitech Ltd said, “the company’s buildings are sold to unrelated parties, not (the) promoters.”
He did point out that Unitech had sold a 60% stake in six office projects to Unitech Corporate Parks Plc. (UCP), a real estate investment firm registered in the Isle of Man, a tax haven, and listed on the London Stock Exchange’s AIM, an exchange for smaller companies. In January, UCP had a $698 million issue on that exchange. UCP, the spokesperson added, is an independently managed firm in which Unitech Limited and the company’s promoters, the Chandra family, do not own any stake.
Both Parsvnath and Unitech are publicly traded companies and compete with DLF.
Real estate firms in India are rushing to raise money either through public share sales or private equity deals as the rising value of homes and office space is pushing up valuations in the country. A 9% growth in the economy and tax breaks on home loans has led to record borrowings to fund real estate purchases. Land which was worth about Rs 650 a sq. ft about five years ago is now worth about Rs6,000 a sq.ft in Delhi’s suburb of Gurgaon, the area that DLF helped create as the Capital’s most expensive extension. Companies such as DLF need money to fund their land purchases; DLF, for instance, carried debt of Rs 9,450 crore on its books as on 30 November 2006, according to its filing.
Commercial real-estate funding by banks has swelled 500% in four years. In the last two years, foreign companies, including Morgan Stanley, Siachen Capital and the Emaar Group, have invested more than Rs13,000 crore in the Indian real estate market through joint ventures and direct investment in projects, according to property management firm Jones Lang LaSalle. Investor George Soros has stakes in real estate firms such as Ansal Properties & Infrastructure Ltd, a rival of DLF.
This is the company’s second attempt to tap the equity market for funding in six months; its first had to be abandoned after a dispute with minority shareholders. DLF was a listed company until 2002-03 when its promoters increased their holding in excess of 90%.
This was in violation of a stock market regulation and the company paid a fine of Rs5,00,000 and offered to buy the public’s holding at Rs320 a share. Some shareholders, however, decided not to accept this offer and retained their shares. They alleged that most of them were left out of a rights offer made by the company in 2005 , a subsequent bonus issue, and a stock split.
In effect, they claimed that they had lost out on 400 shares each. The company’s failure to reach a settlement with these shareholders, numbering around 1,300, forced it to cancel its planned IPO in 2006. It has since settled with them.