India’s market regulator is serious about clamping down on manipulation by real-estate companies inflating their land banks to boost value and is unfazed by concerns that new disclosure norms will keep realty companies from tapping the market.
“I believe if that is the case then they should not be there in the first place,” said M. Damodaran, chairman of the Securities and Exchange Board of India (Sebi), while addressing a meeting organized by the Tamil Nadu Investors’ Association.
Sebi recently tightened disclosure norms for real-estate companies that want to raise money by selling shares. As per the norms, companies are allowed only to show land that they own, not the land they intend to buy in the future. Moreover, the valuations have to be based on the current market value and not on future projections.
Damodaran spoke of the extent to which land banks were manipulated and said the market regulator would not allow the practise to continue. Some real-estate companies are inflating landbank values ahead of a public offer of shares by temporarily acquiring land from farmers for a fee and then returning the land to them after the public issue, Damodaran said.
“I have seen documents shown to me by farmers which show that a certain plot of land has been sold to a real-estate company and a subsequent document simultaneously executed for a subsequent date which shows that it is sold back to that person,” he said.
He said the farmers are paid a “little money” for signing the documents. “The first set of documents is what is made available when you build up the landbank and having raised your money, the second set of documents becomes effective. That is, on non-existent landbank you would have parted with money,” Damodaran said.
As much as Rs4,000 crore out of a total of Rs20,000 crore raised through share issuances last year was by real-estate developers. That pace has slowed so far this year as several initial public offerings, including that of Purvankara Projects Ltd, DLF Ltd and Omaxe Ltd, have yet to be cleared by the stock market regulator.