Rendering Indian Developers Transparent: The Investment Process

While the price of land and profit-sharing are contentious issues, they are not the only conditions negotiated between developers and investors. Foreign investors attempt to ensure the return of their capital by managing their relationships with developers. Most importantly, they hope to change their partners’ business practices and systems, rendering them legible, acceptable partners that they can control and from which they can profit.

Investors often think of developers in terms of how they can be controlled. One fund manager commented that established and “emerging” Indian developers pose different challenges:

The established player doesn’t want the value added. “I’ll just take the money, thanks.” The emerging player is getting lots of opportunities, so you need to help him stay focused on what you’re doing. The new developers – you need to help them set up an organization.

By “value added,” he means the advice and organizational interference that a new developer might be more willing to accept. Keeping an “emerging player focused” means controlling the projects he works on. Another fund manager told me that his fund specifically sought out newer developers, precisely because they are more easily molded:

[W]e are trying to pick up new developers, because, you know, certain people have done certain things and they’re mindsets are now fixated. But there are a lot of new young guys who want to do certain things, who have more fire in their belly. So you’re trying to incubate those kind of development companies, and saying, we will provide you capital, we will provide you our global perspective.

Again, by “global perspective,” he means advice. He felt that a new company, working on its first or second project, “will have a huge desire to execute it well.” This bodes well for his firm’s chances of seeing a finished project and a return on its investment.

Suraj, a fund manager we met at the beginning of the chapter, plans to develop intensive partnerships with a small number of developers, investing at the company level in order to work on numerous projects with each developer. (Simon shared this approach, commenting “You know, I’d rather have half-a-dozen developers dotted around the country than twenty-five developers I can’t control.”) With this approach, he feels he can achieve more control over each project, as well as changes in the development firm’s management

structure. Over time, he can build up a collection of assets and can exit his partnerships by taking firms public. This approach also produces a variety of buildings in different markets and limits the risk of being ignored or “written off” by the developer:

[I]f a developer has a number of opportunities that he’s

developing with a variety of capital partners, then he could pick us off. If we get picked off, he’d be like, “Listen, I just don’t, you know, that asset is dying, and that happens to be yours, and I don’t feel like working on it. I’d rather work on the other ones, where I’m going to make a lot of money. And I’ll write that off.” But we can’t. We can’t afford to write it off. So knowing that, we’d rather sort of be in that net, so we can collectively decide which ones to focus on and which ones not to focus on.

Working on numerous projects with one developer, Suraj hopes to maintain more control and to safeguard his returns.

He has also had luck working with “start-up” firms. He told me his first deal was with a young firm, enabling him to have “a significant hand in the development of the organization.” Suraj told the firm’s owner that he wanted him to focus on acquiring land and building relationships, and to hire a CEO to run the company. He told him, “You’ve got to hire a CEO that will to do X, Y, and Z and you’re never going to be that CEO.” Although this was “a difficult thing for anyone to hear,” the partner complied, transforming the organizational structure of his firm into a corporation run by a CEO and Board of Directors, something familiar to Suraj’s fund’s investment committee.

Suraj has been surprised to find Indian developers “open” to such demands. He concluded,

[T]hey’re [Indian developers] all focused on the idea of creating value for themselves. They’re very entrepreneurial and capitalist in that sense, and to the extent that you are ah – and even if it means an ostensible lack of control, I think they’re, they’re – the

surprising answer is that they’re really willing to give it up in the face of potential value creation for themselves.

The “value created” through tie-ups and public offers includes both prestige and profit. Investors believe developers are interested enough in such value to give up control of their own firms.

When Indian real estate developers refuse to adopt foreign investors’ working methods, they can lose out. The senior vice president of an American private equity firm, an Indian man, told me about a deal that fell through. The project looked promising –

approvals in place, land with a single owner, good location – when, “Suddenly we realized the partner doesn’t have the mindset in which we want to operate. He was a local guy.” Explaining the differences in “mindset” between his international investment firm and the “local guy,” he said,

[W]e want to bring in certain systems and processes. We want to have certain disclosure norms. We want to have how we’ll monitor the certain project. Maybe we want a project manager team, we want certain level of, you know, people with certain credential to manage each of the projects.

The Indian developer questioned the cost of hiring professional managers and tracking systems, so the U.S. investors, concerned that they would not be able to achieve a level of control over the design and construction process that made them comfortable about investing their money, backed out.

Govind, a developer we met earlier, had been approached by various foreign investors (Morgan Stanley, Merrill Lynch, Trikona Capital, and others) but was ambivalent about foreign direct investment. He found potential investors’ reservations to his way of working unrealistic, commenting “It’s a very home grown industry, the real estate industry.

There’s no set norms, there’s no set rules – you can’t go by, there is no by the book over here. You can’t do it by the book.” He doesn’t believe real estate can be done in India in a formal, “by the book” manner. He told me he would rather hire an international consultant than work with a partner who would insist on change:

Why do you need a strategic partner, you know, who will tell you how to do things and say “OK, now” – there is too much interference. See this is a very delicate issue. You are used to a particular way of functioning, you have professionalized your set up but still you want independent decision making because that is what sees you through real fast, so right from day one, getting so much of interference is not going to be very easy because you are, you know, you have be conditioned to a particular way of

functioning. So changing yourself over night is not possible.

He had yet to agree to a joint venture with a foreign firm because he was wary of such “interference.” He did not want to give up his “independent decision making,” his ability to move quickly to take advantage of opportunities, and his usual ways of working. In short, he did not want to give up control over his firm.

Many developers, however, have formed a joint venture with a foreign investment company, or they have taken their company public, attracting foreign investors to buy their shares through a listing on the Bombay Stock Exchange. Both avenues to investment require some change on the part of the developer. Just as a joint venture often necessitates loss of control, listing on the stock exchange (“going for an IPO”) requires meeting the stringent disclosure requirements of the Securities and Exchange Board of India.

Many firms approach the public offer as a means of publicly demonstrating

compliance with these rules. For example, a little over a year before Emaar MGF’s attempt to list on the Bombay Stock Exchange, the chairman of the firm’s Dubai-based partner (Emaar Properties PJSC), Mohamed Ali Alabbar told Realty Plus magazine,

[O]ur intent of going public is not just to raise capital. It is mainly because I like the transparency that comes with the publicly listed companies. As a listed company, we will be keenly watched by the public and the authorities. And as such there will be pressures on us to perform and meet targets in an aggressive manner. (Realty Plus 2006d)

Like a successful joint venture with a foreign partner, going public is a badge of transparency.45

Just as working with a foreign partner confers prestige, “there is an ego element involved” for the firm going public, explained Chetan, a public relations agent who has worked with many real estate firms during the listing process. When Delhi Land and

Finance (DLF) announced plans to go public in the spring of 2006, the Indian business press interpreted the decision as a personal accomplishment for the company’s chairman K. P. Singh. A month before the offer, one author predicted,

With a forthcoming public issue of nearly Rs 10,500 crore for a 10 per cent stake in DLF, Singh, with a holding of 90 per cent, will be catapulted to the global stage as the fifth richest man in the world and the richest resident Indian (worth Rs 90,000 crore or around $20 billion), pushing Azim Premji to the second Indian slot. (Menon 2006)

The author (and others in the press) understands the public offering as a route to personal glory. Providing wealth legitimized by both the Security and Exchange Board of India and foreign institutional investors, the public offer would enable Singh to compete on “the global stage” of capitalist entrepreneurs. It could transform him from Indian real estate developer to world class professional.46

45 _{Jones Lang LaSalle regards public listings as a sign of transparency. They report that “The number of listed} companies in the real estate sector has increased multi-fold over the past 2 years, which has served to improve accounting standards, financial disclosure and corporate governance” (Jones Lang LaSalle 2008, 5).

46 _{Commentators felt that DLF’s presence on the stock market would also change the image of Indian real} estate in general. Akshay Kumar, head of the property consultant Colliers Jardine in India is cited in the same

After running into minority shareholder opposition, Delhi Land and Finance had to withdraw its prospectus and cancel the listing.47 _{Chetan, the public relations agent,}

commented,

You know, DLF was so upset about the IPO [initial public offer] process being derailed, they did all these things to get back. Because for them it’s a reputation. “They couldn’t do that, you know, they may be big, but they couldn’t go for it. Their books are all bad, that’s why.” You know, so then the reputation factor comes in. Once you go through it, they feel that OK, we are listed company, we are answerable to SEBI [Securities and Exchange Board of India], government, our investors. So it’s like, whatever they do, it’s fine.

Chetan feels that the failure to list cast a poor light on DLF’s operations; he even suggests that the public might have suspected improper accounting and dubious dealing, “their books are all bad.” The firm’s subsequent listing in June 2007, then, provided its promoters an opportunity to reverse public opinion.

Both to access capital and to prove their worth, a large number of Indian realty and construction firms have listed on the Bombay Stock Exchange in the past several years (Table 3.1). In addition, the London Stock Exchange’s Alternative Investment Market (AIM) has attracted public offers from the Indian firms K Raheja (Ishaan Real Estate), Hiranandani Constructions (Hirco), Unitech (Unitech Corporate Parks), India Bulls (Dev Property), and West Pioneer Properties. In 2007, the press reported many other firms planning initial public offers (e.g. Hussain 2007a, 2008a; Sukumar 2007).

article as saying, “The entry of DLF into capital markets would improve the stock of real estate sector in India. With its high ethical standards and huge size, it is poised to change the way the world looks at the realty sector” (Menon 2006).

47 _{DLF had previously been listed on the Delhi Stock Exchange until 2003. When it delisted, some minority} shareholders remained with the company. Many of them, however, did not receive offer letters from DLF when the firm later converted their debentures into equity shares. They filed against DLF with the Securities and Exchange Board of India (SEBI), which forced DLF to withdraw its public offer prospectus (Sinha 2006). DLF settled with its minority shareholders for Rs1,300 crore before re-filing with SEBI in 2007 (Dalal 2007).