New Delhi: Real estate firms continue to buy and hold land through tens of subsidiaries, or hundreds of companies promoted by their subsidiaries or promoters in an attempt to acquire such holdings cheap, although the Urban Land Ceiling Act, the original reason for this practice, has been repealed in most states including Delhi and Maharashtra.
Thus, according to filings made by Emaar MGF Ltd in the run-up to a public issue of shares that had to be scrapped after poor response from investors, the company has 360 so-called entities that hold land. Emaar’s subsidiaries have minority stakes in these entities, but collectively own them.
A LEGION OF SUBSIDIARIES (Graphic)
The 360 entities in this case account for almost half, or 6,600 acres of Emaar’s land bank.
Disclosures such as this are being made now because India’s stock market regulator Sebi mandated last year that real estate companies seeking to sell shares to the public need to disclose details of their land holdings—including specifics such as the names of their subsidiaries and companies promoted by subsidiaries that own the land that figures in their land banks.
Omaxe Ltd, a company that sold shares to the public last year, has 31 subsidiaries and 169 entities floated by its promoters.
The Urban Land Ceiling Act limited the amount of land that could be held by one firm, and while it has been repealed in most states, real estate firms continue to hold land through subsidiaries and entities. That is because, individuals and companies selling land usually demand and expect a bigger price from large developers. And, when a well-known developer acquires a piece of land, the value of the surrounding land increases, making it more expensive for the same developer to acquire more land in the area. Acquiring the land through an entity that isn’t immediately associated with the developer addresses both problems.
Companies floating multiple subsidiaries is not a new phenomenon in India. In the case of business groups or conglomerates, the holding company itself remains unlisted while some or all of the other firms are publicly listed. The Tata group is a case in point. Holding company Tata Sons Ltd is unlisted while some of the main companies in the group, such as Tata Steel Ltd, Tata Motors Ltd, and Tata Consultancy Services Ltd, are listed. In real estate sector, promoters have listed their holding companies, said Ganesh Raj, head, real estate practice, Ernst and Young.
Some real estate firms say they continue to operate through subsidiaries or entities to make it easier for them to acquire land. “When owners of land come to know that big companies like us are buying the land, they quote higher prices and make it difficult to acquire”, said Emaar chief financial officer Sanjay Baweja.
There is no specific ratio between the number of companies floated and the area of land to be acquired; Arvind Parekh, director of Omaxe, said the company would typically float seven or eight companies to acquire between 300 and 400 acres of land.
Real estate developers also claim that holding land under subsidiaries helps them compartmentalize different phases in a single project or to float a project as an independent entity. It also allows them to tap foreign and local funds.
“Subsidiary companies also help in reaching out to funds. Companies at the enterprise level may not want to dilute (their equity) but they may not have a problem in diluting equity in subsidiaries formed for a specific project,” said Omaxe’s Parekh.
From the accounting perspective, having subsidiaries helps companies avoid stamp duty on the sale of land. Once a subsidiary acquires land, any transfer of land thereafter involves a transfer of shares in the company.
“Most of the subsidiary companies are land holding companies. It allows us to exit projects without much difficulty,” said R. Nagaraju, general manager, corporate planning and strategy, Unitech Ltd.
Still, the logistics of maintaining such a large number of firms isn’t always easy. Under the Companies Act, firms have to make an application for incorporating the company. After this, the Registrar of Companies issues a certificate of incorporation. A company cannot start functioning unless it receives Certificate of Commencement of Business. With so many procedures to form a company, Baweja of Emaar said they usually register companies even before they begin acquiring land.
Once the company is operational, each entity has to have at least two directors, get its account audited and conduct one annual general meeting (AGM). With 200 or 400 subsidiaries, it might sound a logistical nightmare to have so many board meetings and AGMs in a given year. But, it is not so. Companies say all they require is a good legal team.
“Every subsidiary normally has two directors, so the AGMs are more of a routine process,” said Parekh.
By law no individual can be a director in more than 20 companies. It helps if the promoter has a large extended family. In most cases, directorships are filled by employees or relatives.