Bangalore: Several private equity (PE) firms have initiated legal or arbitration proceedings against their real estate partners in India over corporate governance issues or delays that restrict the funds from selling their investments.
New York-based AIG Global Real Estate recently sent a legal notice to Bangalore-based real estate company RMZ Corp. over their equal joint venture project in Hyderabad. AIG wants RMZ to sell its stake in the project as it has been unable to develop it the past few years.
In another such instance, Citi Property Investors (now known as Apollo Global Management Llc.) and JP Morgan Chase and Co. have initiated separate arbitration proceedings against BPTP Ltd claiming the developer hasn’t been able to provide options to the funds to sell their holdings, The Economic Times reported on 4 October.
Property analysts fear this is only the beginning of several such disputes and that they could lead to a further negative investor sentiment towards the Indian real estate sector.
Executives at many PE funds that are in arbitration or other legal processes against developers confirmed the disputes but declined to be identified, citing the sensitivity of the issue. “We are going to see many such instances of funds and developers going into arbitration or to court, so that the former get their money back. This is a last-stage effort with many funds coming to a close, and need to return money to their investors,” said Ambar Maheshwari, managing director, corporate finance, at property advisory Jones Lang LaSalle.
Many PE funds that invested in real estate firms or projects during the sector’s peak years of 2006-07 are nearing the end of their investment horizon, which means they need to return money, preferably profits, to their investors. But with the development of many projects being delayed and realty firms being unable to launch public share sales because of volatile markets, the PE firms are stuck. AIG’s relationship with RMZ—it has invested around $200 million (around Rs.1,100 crore) in five projects with the developer—has turned bitter over the delay in the Hyderabad project.
“The fund is fighting tooth and nail to make RMZ exit from the SPV (special purpose vehicle). Then a decision will be taken on whether AIG will develop the project on its own or find a new partner,” said a person familiar with the development, asking not to be named. “AIG is now planning to auction the Hyderabad site, though RMZ is not agreeing to it.” RMZ managing director Raj Menda did not reply to emails sent earlier this week.
The more serious charge is that of lapses in corporate governance.
Mausmi SA Investments Llc., an associate company of PE fund Sun Apollo, earlier this year filed a petition in the Company Law Board (CLB) alleging fraud and misutilization of funds by developer Rustomjee Group. Sun Apollo had invested around Rs.234 crore in Rustomjee’s holding company Keystone Realtors Pvt. Ltd three years ago.
CLB dismissed the ad-interim petition and asked the two parties to resolve the dispute through arbitration.
Boman Irani, chairman and managing director, Rustomjee Group, said the fund has appealed against the CLB order in the Mumbai high court. “We will defend our stand in the high court,” he said.
A senior fund official at a PE firm that has invested in a real estate company currently in arbitration with its other investors, said due diligence is important to see whether the issue is only about being unable to return money to funds or a graver one related to corporate governance.
“Many of these deals were done at entity level, where the investor had over-valued the company. With the erosion of valuation, it is only natural that funds have not made the desired returns,” he said.
BPTP is already in arbitration with Apollo Global and JP Morgan Chase, a company executive said, also declining to be identified. Spokespersons of JP Morgan and Apollo Global declined to comment on the issue.
Balaji Rao, founder, Indic Capital Advisors Pvt. Ltd, said there was a systemic failure in terms of enforcement of contracts between funds and developers. “Promises and pledges have been made by developers and now many are trying to wriggle out of their contracts. Some of these go into arbitration, else they go to court. The long-term impact of such issues on India as an investment destination would be negative,” said Rao.
Given that PE firms aren’t able to give their investors profitable returns, the investors may want to put their money into India’s real estate market directly than through the funds, said Raja Kaushal, managing director, BNP Paribas Real Estate and Infrastructure Advisory Services Pvt. Ltd. “Since many fund managers haven’t performed, going forward we will see investors wanting to invest directly so that they have full control over the capital.”