Will a real estate empire suffer from its Vadragate?

Last Updated: Thu, Oct 25, 2012 04:27 hrs

"A meeting in Gurgaon one afternoon with a young man driving an all-terrain vehicle had much to do with this. His vehicle had stalled.... I happened to be nearby and arranged for water to cool the radiator. He asked me what I was doing out in the wilderness and heard with great interest about my plans and how archaic laws and policies were stifling real estate development. Not long after, he became the prime minister of the country and was instrumental in ushering the private sector back into urban development. These reforms would revolutionise the real estate sector and also allow DLF to expand at a scorching pace...."

This excerpt, from DLF Chairman K P Singh's autobiography, Against All Odds, refers to former prime minister Rajiv Gandhi as being key to India's real estate's transformation, as well as DLF's 'scorching' expansion, especially in Gurgaon, which lies next to Delhi.

Ironically, many decades later, the Gandhi family has once again become associated with the developer, but, this time, instead of tales of uber-expansion and wealth creation, embarrassing questions about favours and unorthodox dealings lurk. Thanks to political instigator Arvind Kejriwal, Robert Vadra - married to Rajiv Gandhi's daughter, Priyanka - finds himself squarely in the crosshairs of the media for allegedly getting unseemly concessions from both the Haryana government, as well as DLF, in connection with land deals in Gurgaon and Manesar.

349 mn sq ft Total land bank (as of Dec 2011) Rs 22,680 crore Toal debt as on Jun 30,'12 Rs 10,000 crore Divestment target in medium term
  • Recent launch: March 2012 - DLF Regal Garden, Primus (New Gurgaon)
  • Non-core assets on the block: Aman Hotel, wind/utilities, strategic projects in Mumbai & Chennai, miscellaneous assets
  • Expected realisable value from non-core asset sale: Rs 7,500 crore
    (including the recent Mumbai NTC mill sale)
  • Sep '11: 28-acre land in Gurgaon to M3M for Rs 440 crore
  • Dec '11: Offloaded stake in Galaxy Mercantile to its JV partner, IDFC, for Rs 450 crore
  • Dec '11: DLF and JV partner Hubtown sold an IT SEZ in Pune to private equity firm Blackstone for Rs 810 crore
  • Jun '12: Entire stake in Adone Hotels and Hospitality Limited ('Adone') for Rs 567 crore to Kolkata-based Avani Projects and Square Four Housing & Infrastructure
  • Aug '12: Sold Mumbai NTC mill land to the Lodhas for Rs 2,700 crore

Source: DLF, industry

Auditor's take
The main allegations made against Vadra and DLF revolve around an interest-free loan of Rs 65 crore made to Vadra's company, as well as sweetheart apartment deals involving the company and Vadra in Gurgaon.

The company denied it had given any unsecured loans to Vadra or his companies, claiming that the Rs 65 crore was given as a business advance for the purchase of two pieces of land from Vadra's Sky Light Hospitality.

DLF did not grant Business Standard an interview in order to answer the various questions regarding this controversy. The company has, however, denied allegations made by India Against Corruption's Kejriwal point-by-point.

Yet, any of the auditors and chartered accountants that Business Standard spoke to - none of whom wanted to come on record - did not buy DLF's clarification that it had given a 'business advance' to Vadra, and that there was no quid pro quo between the two.

A senior partner at a leading audit firm points out that accounting rules do not permit companies to give interest-free loans even to their subsidiaries, let alone others. Even as DLF claimed that a business advance, and not an unsecured loan, was given to Vadra's company, it did not give any detail about the business for which the advance was paid, the partner said.

Another chartered accountant argued that if an advance amount was refunded without the business maturing, there would always be a doubt about the nature of the transaction. He was referring to the Faridabad land deal, in which DLF found legal infirmities at a later stage and Vadra's company Sky Light Hospitality refunded the Rs 15-crore 'advance'.

That said, business advances are not unusual. "Companies do give advances to suppliers or customers in the hope of a return without a contractual agreement," according to an auditor.

However, DLF has always maintained that its relationship with Vadra or his companies was transparent and at an arm's length. "Our business relationship has been conducted to the highest standards of ethics and transparency, as has been our business practice all around," says DLF.

The impact of Vadragate
Despite DLF's denials, analysts and industry insiders indicate that the builder is bound to suffer at least short-term pangs because of the Vadra saga. "The core, or its normal business, will get impacted in the short term, maybe in the form of a delay in Magnolia Phase II launch or the Aman hotel deal getting deferred further," says a stock market analyst.

The fact that it's been seven months since DLF launched any big project is adding to the gloom. India's largest realty player had said in its first quarter analyst call that Phase II of Magnolia, a big-ticket DLF project for luxury homes in Gurgaon, would be launched anytime in the third quarter of 2012-13, probably in October. Industry watchers are keenly awaiting both DLF's second-quarter numbers, expected in early November, and management replies to analysts' queries soon after.

Also, while the Mumbai land deal, part of its non-core asset sale, was inked recently, the other two - Aman hotel and wind energy business - have been languishing. Add to that the current land deal controversies, and the result is less than appealing. On BSE, DLF stocks have declined nearly 15 per cent, from Rs 241 to Rs 205, ever since the Kejriwal allegations surfaced earlier this month. "Now, I see support at Rs 190 per share for DLF," says an analyst.

"It will take another one year for DLF to get its functions back to normal," says Samarjit Singh, managing director of IndiaHomes, on the impact of the Vadra saga on DLF. He adds that a lot of land holdings of the company will come into question now. That might delay its big project plans by about a year.

But, not many are as forthright as Singh. The India head of an international real estate consulting firm argues there's nothing new about the real estate-political nexus. While the stock price is sentiment-driven, it may not reflect the fundamentals about the company accurately, he says. "I doubt whether the allegations will have any material impact on DLF," he points out, adding that people, however, might not transact on projects that are under scrutiny.

Other hurdles
Even as the current controversy could delay the second phase of Magnolia to some extent, Sanjay Sharma, managing director of property portal Qubrex, says DLF might also not be able to launch it as planned because of the 'cease and desist' order issued by the Competition Commission of India. This would prevent the realtor from using the same terms and conditions in the buyer-builder agreement, which were found to be biased towards DLF. Found to be allegedly abusing its dominance in the Gurgaon market, it was levied a penalty of Rs 630 crore. The matter is in the Competition Appellate Tribunal.

While DLF's debt, as on June 30, stood at Rs 22,680 crore, it hopes to reduce it by the fourth quarter. In the second quarter, it sold the NTC Mill land in Mumbai to the Lodha group for Rs 2,727 crore. "As the Lodha payment will come in the third quarter, we can see some debt reduction only in the fourth quarter," an analyst said.

American writer Tom Wolfe's 1998 novel, set in Atlanta, A Man In Full, about real estate tycoon Charlie Croker's rise and fall, captures the power and frailty of the world of developers. Wolfe writes, "Charlie was a one-man band. That was what a real-estate developer was, a one-man band! You had to sell the world on… yourself! Before they would lend you all that money, they had to believe in…you!"

K P Singh's empire, though saddled with mounting debt, may be able to get over the current turmoil triggered by an activist's 'expose', but, the alleged revelations on how politics and real estate are intertwined, often for mutual benefits, will be hard to erase.

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