Cash-Strapped Realty Companies Eye Rs 15K-crore mop-up

November 13, 2009    


Cash-strapped real estate companies looking for succour from the
capital market are likely to run into headwinds on the pricing front.
 Market watchers say unless the promoters price their issues a bit more
 realistically, they are likely to see a tepid response from investors.
Some of the high-profile new issues over the past few months were
felt to have been priced expensively, resulting in the stocks faring
 poorly on listing.

Nearly a dozen real estate companies are looking to mop up over
Rs 15,000 crore through public offerings in the coming months.

Godrej Properties, DB Realty, Emaar MGF, Lodha Developers,
Sahara Prime City, Kumar Builders, Ambience, Ashoka Buildcon
are among the companies which have filed their draft red
herring prospectuses (DRHP) with Sebi.

Those in the pipeline, but which have not
yet filed their DRHPs, include Nitesh Estates,
 Prestige Constructions, BPTP and Oberoi Constructions .

The IPO-filings mark the second round of fund-raising in the real estate
industry, which had been wracked by the global financial crisis and the
 resultant drop in demand. Signs of a revival in the residential segment
 in April-May this year, prompted many to hit the capital market to raise
funds. Merchant bankers are, however, sceptical about investor appetite
 given the huge overhang of paper. “There are serious challenges on
the pricing front,” says Nimesh Shah, MD, Fortune Financial.
 Mr Shah is of the view that there is too much paper on offer
at the moment, which is dampening investor appetite.

“And with almost all of the recent quality companies quoting at
a discount to the offer price, the prospects look bleak,” he added.
 Industry experts point out that investors should look at the earnings
 model of the real estate companies rather than the landbank model
 because in the latter, prices tend to be volatile. Also, there are
concerns that builders are putting value to the whole piece of land
 where they have partial ownership.

“Investors need to do due diligence as to whether the land bank
 is agricultural land or non-agricultural land. Currently, valuation
of land is being done arbitrarily. If it is agricultural land, one needs
 to factor in the cost of conversion (property tax & cost to be paid to
 the government etc),” said a real estate developer on condition of
 anonymity. Investment bankers believe that this phenomenon is not
 true of India alone but is also seen in other countries like China.
“Real estate companies are quoting at an almost 60% discount to
their NAVs,” said a banker with interests in the region.

“Given the overall weakness in the IPO market in the recent months,
 pricing and quality of promoters will be paramount,” says
 Munesh Khanna, CEO & MD-investment banking, Centrum Capital.
 However, JC Sharma, MD, Shobha Developers, believes one should
 look at the macro picture. “The real estate industry is still not getting
 proper representation in India. In a developed/developing economy,
it constitutes 10% of the market cap of the country. We still have a
 long way to go,” he told .

A check list for NRIs buying a house in India

NRI Real EstateInvestment from any source in the housing sector
 is an appreciated aspect in today’s indian real estate scenario,
 from an industry perspective. Let it be Resident Indians, NRIs
or even companies, constructing houses creates jobs for a lot of people.

A back of the napkin calculation shows that for a 1000 sq feet house,
 100 direct employment (architect, building engineer, masons, helpers,
 electricians, plumbers, painters, carpenters, etc) and over 1000 indirect
 employment (people working in cement plant, brick kilns, tiles kilns,
 electrical fittings companies, saw mills, steel plants, paint companies, etc)
opportunities are created. Of course the duration of the employment will
 depend on a number of factors like nearness to a supply sources for
material and labour, access to high tech equipment, architecture, etc.

But to construct a house is not all that easy. It is not without substance
 that a Tamil saying goes, “Veetai Katti Par, Kalyanathai Panni Par”
(Basically the saying rates constructing a house and having a child’s
 marriage done among the toughest).

To an already difficult task, the sheer distance and absence during
construction become problem multipliers for the NRIs.

There was an NRI based out of the USA who
got a wonderful sales pitch from a builder.
 The salesman met the NRI at his office in the USA and arranged for all
 the documentation and also sent video clippings of the apartment at
 Bangalore. Convinced on the genuineness, the NRI
transferred Rs.50 lakhs to the builder’s account.

The date for the house warming was fixed after one month.
The NRI could not make it to the function due to a pressing office
 work and had asked his parents to do the poojas.

The parents got the shock of their life, when they landed at
the apartment complex the day before the poojas.
The complex had only one sample apartment finished
 (the one in the video). They were told by the Project Manager
 at the site that the poojas can be done at anytime but the
apartment can be delivered only after “6 months”.

Another NRI who was building the house himself using an
experienced and well referenced engineer found that his
house orientation has been shifted by 15 feet. This left him
 space on the wrong side of the house squashing his plans
 to build a small commercial complex in future. They now
 have space for parking 4 cars but none for building a
rent worthy space !!!

A number of checks could have been used to be on the
safer side in both the above cases:

Thankfully there are a number of professional builders who
 are a lot more trust worthy. So doing a bit of research on the
 track record of a builder can help.

1.For any real estate purchase it is preferable to make visits to
 the sites before buying them. This exercise is worth it not
 only because we are committing a large amount of money
 but also because reversing the decision proves costly as well.
 If the NRI is not able to make it, he can request a trusted friend
or relative to opt for the site visit.

2.Going for a housing loan through a bank will ensure that the
 money is released in stages only. This keeps the money safe
during the construction. Also, all the banks at their local branches,
have their list of shortlisted builders for whose constructions loans
are pre-approved. It is better to buy only these constructions, as the
 banks are quite stringent in their norms for pre-approval and shortlist
 only those builders who have a proven track record and those project,
which comply to all legal norms.

3.Post the construction, the management of the asset is one of the major
 issues faced by NRIs. There is no easy solution for this. There are some
 society associations which support the owners of the buildings with
 services like maintenance and rent collection. There are again the
 “friendly neighbor hood real estate agents” who may some times
 double up as the maintenance manager too. Many times though the
 “friendly” turn into “greedy” after some time. There are a few
 professional real estate management firms in most metros, who
 are now expanding into the 2nd Tier cities too.

4.Whether the construction rate quoted is for Built-up area or
Carpet area? Construction is generally quoted for built-up area
 and rental is quoted only for the carpet area. There can be
a difference of 15 % to 20% between the two based on the type
of construction. Today in apartments there is the concept of super
 built-up area which apart from the built-up area includes stair
case, common passages, fire escape passage, etc.

 The super built-up area can be bloated by as much
as 50% of the carpet area.

5.Robert Allen, the Real Estate Mogul suggests the 100 - 20 - 10 - 1 rule
 for any real estate purchase. The idea is to check out 100 properties
in person; shortlist 20 of them for a deeper scrutiny; enter into negotiation
 with sellers for 10 of the properties and finally buy the ONE that is best suited.

6.Technically there should be a check for all the statutory approvals - town
planning (Nobody wants a flyover at arms length from the balcony!),
water supply and sewage disposal, safety approval from the local fire
 department, etc. It is always better to ask for the encumbrance
certificate and the title deed from the builder to get a legal opinion
 from a lawyer.

7.Don’t hesitate to ask. This is probably the most important point.
Many times, for avoiding being thought of as less intelligent, we
question less. For any investing and particularly for real estate the
 more the questions asked the better the investment.
The genuineness of the promoter can be gauged by the
patience, the promptness and depth of the answers.
Answers like, “Don’t worry about that, we will manage”,
without going into the specifics are danger signs.

8.Take time. Do not restrain yourself by limiting the time for
checking the properties and decision making to the time that
 you are present in India. A 2 to 4 week holiday cannot be
hoped to be converted into a real estate investment period.
Start the process before you come here. In case you cannot
decide before you leave, it is OK. A Power of Attorney to a
parent or a relative can be used to decide on the actual
 purchase even after you leave the shores of India.

Construction activity is not manufacturing u/s. 35D of the Income Tax Act, 1961

SUMMARY OF CASE LAW

Those undertakings would qualify as `industrial undertakings’ which
 are involved in `manufacturing activity’; the activity of construction can,
 by no stretch of imagination, be treated as manufacturing activity as
it does not amount to manufacture or production of an article or a thing.

CASE LAW DETAILS

Decided by: HIGH COURT OF DLEHI,
 In The case of:
 Ansal Housing & Construction Ltd.  v. CIT, 
Appeal No.: ITA Nos. 1261,1278,1287 & 1402 of 2008,
Decided on: October 30, 2009

RELEVANT PARAGRAPH

11. In the absence of any definition provided under the Income
Tax Act, it would be admissible to find out the scope of this
 expression by resorting to its meaning in common parlance
as understood by common persons or its natural and grammatical
manner. Law Lexicon, the Encyclopedia Law Dictionary (1997 Edition),
provides the following meaning :-

“Industrial Undertaking –

To be an industrial undertaking, the work of manufacture or production
should be carried on in one or more factories by person or authority
 including Government.”

Likewise,Wharton .s Law Lexicon (Dictionary) (15 th Edition) defines
 this expression as –

“any undertaking pertaining to a scheduled industry carried on in
one or more factories by any company but does not include-

(i) An ancillary industrial undertaking as defined in clause (aa) of
 section 3 of the Industries (Development and Regulation) Act, 1951;
and (ii) a small scale industrial undertaking as defined in clause (j)
of the aforesaid section 3. [Sick Industrial Companies
(Special Provision) Act, 1985 (1 of 1986), section 3(1)(f)]
Means any undertaking pertaining to a scheduled industry
and includes an undertaking engaged in any other industry,
or in any trade, business or service which may be regulated
 by Parliament by law. [Central Industrial Security Force Act,
1968 (50 of 1968) section 2(1)(b)]. Means any undertaking pertaining
to a scheduled industry carried on in one or more factories by any
person or authority including Government. [Industrial (Development
and Regulation) Act, 1951 (65 of 1951), section 3(d)].”

12. Going by the dictionary meaning as well, one would find that
 industrial undertakings take their flavour from the manufacturing
or production activities carried by factories. The expression „industrial
undertaking .appears in Section 54 -D of the Act as well and the
KeralaHigh Court also had an occasion to expound this term in
the case of P. Alikunju M.A. Nazeer Cashew Industries v. CIT, 166 ITR 804.
That Court was also of the opinion that natural meaning to the
words „industrial undertaking .should be given in the absence
 of any statutory definition.

13. To this extent, there is no quarrel. However, Mr. Ajay Vohra,
learned counsel for the appellant submitted that wide meaning
 should be given to the expression „industrial undertaking .
as was done by the KeralaHigh Court, which is clear from the
following discussion contained in the said judgment :-

“5. What then is an “industrial undertaking” ?
The Income-tax Act does not define what is “an undertaking”
or what is an “industrial undertaking” . It has, therefore, become
 necessary to construe these words. Words used in a statute
dealing with matters relating to the general public are presumed
 to have been used in their popular rather than their narrow,
 legal or technical sense. Loquitur ut vulgus, that is, according
to the common understanding and acceptation of the terms,
is the doctrine that should be applied in construing the words
used in statutes dealing with matters relating to the public in
 general. In short, if an “Act is directed to dealings with matters
affecting everybody generally, the words used have the meaning
 attached to them in the common and ordinary use of language.”
(Vide Unwin v. Hanson [1891] 2 QB 115 , per Lord Esher M. R. at page 119).
That the Income-tax Act is of general application, is beyond dispute.
It, therefore, follows that the meaning that should be given to these
words “industrial undertaking” must be the natural meaning.
It is all the more so because the Income-tax Act is one
 consolidating and amending the law relating to income-tax
and super tax. (See Rao Bahadur Ravulu Subba Rao v. Commissioner
ofIncome tAx (1956) 30 ITR 163 (SC) at 169).

“Undertaking” in common parlance means an “enterprise” ,
“venture”, “engagement” . It can as well mean “the act of one
 who undertakes or engages in a project or business” (Webster),
An undertaking mentioned in Section 54D must be one maintained
 by a person for the purpose of carrying on his business. “Undertaking”
for the purpose of this section, however, must bean “industrial undertaking” .
 The demonstrative adjective “industrial” qualifying the
word “undertaking” unmistakably and with precision shows
 that the undertaking must be one which partakes of the
character of a business. That that is the meaning that is intended
by Parliament is clear from the context in which these words have
 been used in the section. A reference in this connection to the
following clause, namely :

“………being land or building or any right in land or building,
forming part of an industrial undertaking belonging to the assessee
which, in the two years immediately preceding the date on which
 the transfer took place, was being used by the assessee for the
purposes of the business of the said undertaking. …… ”
(emphasis supplied) is profitable. The word “business” has
been denned in the Income-tax Act. The definition reads :

” ‘Business’ includes any trade, commerce or manufacture or
any adventure or concern in the nature of trade, commerce or
manufacture. “

7. Construing this word “business”, the Supreme Court in Narain
Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax
[1954]26ITR765( SC) has observed that “the word “business”
connotes some real, substantial and systematic or organised
course ofactivity or conduct with a set purpose.” Endorsing
this construction, the Supreme Court in a later decision in
Mazagaon Dock Ltd. v. Commissioner of Income
 Tax (1958) 34 ITR 368 has observed (at page 376) :
“The word ‘business’ is, as has often been said, one
 of wide import and in fiscal statutes it must be construed
 in a broad rather than a restricted sense.”

8. The words “industrial undertaking” therefore, should
be understood to have been used in Section 54D in a wide
 sense, taking in its fold any project or business a person
 may undertake. The “running of a lodge”, by the assessee,
therefore, can be said to be an “industrial undertaking”
within the meaning of Section 54D of the Income-tax Act.”

18. Therefore, we are of the opinion that common sense
approach will have to be adopted and those undertakings
 would qualify as industrial undertakings .which are involved
 in „manufacturing activity .

19. The activity of construction can, by no stretch of imagination,
be treated as manufacturing activity as it does not amount to
 manufacture or production of an article or a thing. Law in this
behalf stands settled by the judgment of the Supreme Court in
the case of Commissioner ofIncome Tax , Orissa & Ors. v. M/s. N.C.
Budharaja & Company & Ors., 204 ITR 412. Following this judgment,
the Supreme Court in S.A. Builders Ltd. v. Commissioner ofIncome
 Tax (Appeals), Chandigarh & Anr., 289 ITR 26, held that the business
 of civil construction would not amount to carrying on any manufacturing
 activity. Even this Court in Ansal Housing & Estates (P) Ltd. v.
Commissioner of Income Tax, 1999 (77) DLT 765, opined that the
 business of construction of building will not fall within the ambit
of industrial company. This appears to be a case of sister concern
of the present assessee itself, but, unfortunately, our attention was
not even drawn to this judgment by the counsel on either side.
 In these circumstances, we answer Question No. 1 formulated
above against the assessee and in favour of the Revenue.

India property show to be held on November 13-14 in Doha

   



DOHA: A two-day property show will be held at Ramada Plaza
in Doha on November 13 and 14 to showcase residential and
commercial projects available across India for NRIs in Qatar.

Organised by Chennai based Priya Publications, publishers of
real estate magazines, the ninth global show will display varied
residential and commercial projects ranging from apartments,
developed plots to villas and leased units.

An estimated 15 exhibitors from cities like
Bangalore, Chennai, Hyderabad, Kochi and
Mumbai will display their projects.

Home loans will be offered by housing finance companies. 
Spot approval of home loanswill be made 
available to NRIs during the show on production
 of basic documents salary slip, employment certificate and
bank statement.

A seminar on NRI investment in real estate will be held every
day at 5 pm to apprise expatriate Indians in Qatar on the current
 Indian real estate market scenario, rules and regulations
governing NRI investment and tips for tax planning.

The entry is free and the timings are from 10am to 9pm
 on both the days.

SBI low interest home loan scheme continues

November 9, 2009 

There is good news for home buyers.
The country’s premier bank, State Bank of India, has clarified
that it will not discontinue its special home-loan scheme in
which it charges an interest rate of 8% in the first year of the
repayment period.
As RBI is likely to pursue tight-money policy to contain
inflationary expectation in the country, there are apprehensions
that banks will increase their home loan rates sooner than later.
However, SBI, in a statement, said it does not have any immediate
plans to discontinue its special schemes for home loans.