Global funds get cold feet in participating in India’s disinvestment

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Green is making the government’s ambitious plans to sell its family silver see red! Global Funds, under pressure from its investors, want companies to adhere to green standards.

The move by the government to sell a small part of the blue chip companies like Coal India, National Mineral Development Corporation (NMDC) and Manganese Ore India Limited (MOIL) could run into rough weather. Global funds which were apparently sounded out ahead of the disinvestment plans by investment bankers have said to have poured cold water over the government’s plans.

The government was looking to sell 10 per cent stake each in the three companies during the current financial year. If the government plan were to succeed, disinvestment in the three companies could have fetched it a little under Rs. 25,000 crore or a little under US$ 3.73 billion. The government has set itself a target of Rs. 56,500 crore or nearly US$8.4 billion from disinvestment in the current year.

Some leading funds are believed to have indicated that environment related issues could force them to abstain from the disinvestment process. Several sovereign funds and private equity investors are facing the heat from green groups to abstain from investing in companies which, in their opinion, are not environmentally friendly.

There are already examples of some influential funds having excluded Coal India and National Thermal Power Corporation (NTPC), from their investment radar. Norway’s Government Pension Fund Global (GPFG) decided to abstain from investing in 52 power companies around the world where the main source of energy was coal.

While the disinvestment target of the government could take a hit because of this, the listed companies could also be hit at the bourses because of the lack of funding: in effect, it could be a double whammy for them.

  

Several global pressure groups, citing the need for sustainable environment, are putting pressure on large funds to avoid investing in companies that are not careful about the environment.

Demand for job reservations reverberating across several parts of India

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Jobs! Suddenly, everyone seems to want one.

With the economy not generating enough jobs despite the GDP growing at a healthy clip of at over 7 per cent annually, trouble is brewing across several states with communities demanding reservation for government jobs. The demand for job reservations is a powerful magnet for leaders who want to make their political presence felt.

Last week, an agitation against a rape case in Maharashtra caught the fancy of the Marathas, lakhs of who marched in silent protests demanding justice. The teeming masses also wanted reservation for Marathas in government jobs, claiming that the welfare of the community has been overlooked.

The Jat community in Haryana, which has been demanding reservation for jobs, is again girding its loins. Its community members have been holding rallies in different locations in Rajasthan, Haryana, Punjab and Uttar Pradesh. The significance of holding rallies in Punjab and Uttar Pradesh cannot be underestimated since assembly elections are due in both the states next year.

Gujarat’s saw leader Hardik Patel being catapulted to the national limelight when he led the agitation for the wealthy Patidar community. The Patidars like to believe that their rally was one of the reasons why former Chief Minister Anandiben Patel had to step down. The demand for job reservations has not died down despite the political upheaval that was caused.

In Andhra Pradesh, the demand for job reservation for the Kapu community is gathering some steam too.  Chief Minister Chandrababu Naidu has to handle a situation where Kapu community leader Mudragada Padmanabham went ahead with his third hunger strike in six months. 

The issue of reservation that is cropping up across the country needs to be seen in the light of issues of lack of livelihood. The situation is becoming such where the chasm between the haves and the have-nots has been growing and suddenly the violent protests have new meaning.  In the land of plenty, where opportunities are many, such protests will have no chance to grow.  But with economic growth not leading to employment, issues are bound to creep up.

The Government will do well to look at the issues of the masses and create ample job opportunities so that the country does not go up in flames. While I am not for “reservation” per se, but this disquiet has more to do with a perceived lack of prospects. Villages are getting urbanized and not many are interested in tilling the land anymore, which is seen as a futile endeavour by the educated "connected' youth.

The issue seems to be one of communication and lack of faith in the Government initiatives. The report card of the Government, which is doing an amazing job of policy level changes to propel growth, should not be bogged down by these protests and be seen as doing nothing to address these issues.  Schemes like the SEZ which have been reversed/shelved, which had the potential to revolutionize the job prospects by having mandatory processing areas, need to be relooked at.

The reservations notwithstanding, the faith building measures such as initiating dialogues with the communities, getting industry interested in creating job/employment opportunities, incentivizing private participation in infrastructure and therefore livelihood generation, skilling the masses and offering benefits and entrepreneurial mentoring and options will go a long way in nipping the issues in the bud and send out signals of a proactive government, going that extra mile to showcase its commitment to the people. 

Crude oil prices should get everyone’s eyeballs now...

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Indian government’s elbow room may get reduced dramatically if prices keep inching up

Global crude oil prices have already breeched the $45 per barrel figure in September 2016. Not a healthy sign considering that in January, it had hit the rock bottom of $28 a barrel and the highest of $50 in June. As winters approach demand for crude oil increases, adding to a global upswing in prices.

Crude oil prices have the potential to make or break the global economy. In July 2008, crude oil touched its lifetime high of $147.27 sending the global economy, already in a downward spiral, into a tailspin. It fell to under $50 per barrel in January 2015 for the first time since May 2009, providing relief to many oil consuming nations.

OPEC and Russia, the largest oil producers(28% of 88 Mn barrels of crude) are holding talks to ensure that it is a win-win situation for the oil producing nations. This includes trying to reach a bilateral oil and gas cooperation formula. Some OPEC countries have supported the cooperation pledge by the two countries, suggesting the crude oil under $50 per barrel was “unacceptable”.

Countries like Russia, Saudi Arabia and Venezuela are heavily dependent on earnings from crude oil to sustain their economies. Russia is estimated to lose $2 billion with every dollar fall in crude oil prices while.

Unfortunately, that spells as very bad news for the rest of the world, including India, where 80% of our domestic requirements are met by imports!

Crude oil inching towards the $50 per barrel mark could be a worrying sign for India.

During the last 10 years, India has imported inflation because of high global crude oil prices. Over the years, this has been one of the weakest links for India’s fiscal management.

Over the last 12-18 months, the government has raised customs and excise duties which showed up in its tax collections. During 2014-15, the government earned Rs. 75,441 crore compared to Rs. 46,926 crore a year ago. In addition to this, state governments earn revenue by levying sales tax. The ability of governments will be severely curtailed if crude oil prices were to continue the upward spiral. But, during this time when the prices were sliding, it did not mean that consumers in India paid less.

During 2015-16, as a result of low crude oil prices India’s oil import bill has nearly halved to around $70 billion, giving the government elbow room for spending on growth on schemes like ‘Housing for All’, which could be a game changer for India’s urbanisation plan. Prices of inputs like steel, cement, machinery and other could see an increase with higher oil prices.

I hope that the Government has factored in the price rise of crude imports in the budget, otherwise, with rising inflation, the spectre of a huge fiscal deficit also looms large, spelling trouble for Indian economy!

REITS ARE READY TO TAKE OFF?

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 There has been much excitement about the future of real estate investment trusts (REITs) in India on the back of two interesting developments recently. 


The first was a regulatory change where SEBI allowed REITs to invest up to 20 per cent of their corpus in projects which are under construction. The second was the policy change which now allows REIT investment into educational institutions.

For the realty industry which has been cash strapped for some time now, this is great news. Several companies could use this route to unlock the value in their educational ventures and that is why policymakers should be closely watching the developments.

India is now waking up to REITs, which is an established mode of investment for institutional as well as retail investors for the real estate sector.

REITs have emerged as a tax efficient way to unlock value for real estate companies. Developers invest huge sums in acquiring land, stay invested to build the property as a commercial, healthcare or educational venture which gives a healthy annual return. With REIT funds for educational projects now a reality, realtors have one more option to unlock value for the assets that they own.

REIT is an investment vehicle that parks money in realty projects that have been completed, hence earning rent for the investors. Since it has annuity income, it is referred to as one of the policy measures that can, potentially, transform the Indian real estate sector. At a time when realty returns are negligible, REITs for educational institutions can be a boon for the industry.

SEBI’s regulation has, after careful consideration, decided to keep REITs confined to high net worth individuals. Its conditions impose enough checks and balances on the functioning of REIT to ensure there is transparency in their operation and that the interests of the investors are protected. SEBI’s regulation, debated and discussed at length as it evolved from the beginning of the decade, seem to be a little out of sync with reality.

The recent decision to remove dividend distribution tax and allowing REITs to invest 20 per cent of its investments in projects under construction are welcome. It confirms that the policymakers are in the right direction to make sure REITs can take off. A more aggressive nudge by the policymakers and regulator would help realty companies out of the tight liquidity they find themselves in.

If implemented in the right earnest, these changes have the potential to unlock value for shareholders and assets that these companies are saddled with. Since India’s market regulator does not allow retail investors to invest in REITs, it will not be possible for them to be part of the wealth creation under the REIT model.

But global experience shows that several REITs are also listed at select exchanges, which gives an opportunity to study their performance based to returns given to the markets. Five year returns between 12-24 per cent for REIT funds have been seen in different markets. Japanese and Malaysian markets have been found to have returned 7-12 per cent returns.

For the Indian markets, REITs will be governed by guidelines of the market regulator, Securities & Exchange Board of India (SEBI). It will have to comply with the need for an independent trustee, auditor and others.

Several global funds are looking for better returns and have been eyeing emerging economies to park their funds. India’s strong growth, led by domestic consumption, could be just the right opportunity for these funds. For realty companies, it would mean institutional investors buying a part or entire stake into their projects for annualised returns. That liquidity and unlocking of value could be critical for fuelling further growth for the realty companies.

Creating the win-win situation that could marry the needs of policymakers looking to drive growth further, investors seeking better returns and realty companies who could unlock value hidden in their assets could just be music for India’s growth story.

If there was a perfect opportunity for investors to put in money in India’s commercial real estate and exit after a good return, nothing could be more perfect than REITs.

Issues related to Development in Real Estate...

At different places, I often hear people talking about how real estate companies are awash with funds. Some talk, in hushed tones, about the cash economy and others believe, and perpetuate the belief, that funds are lining up before realty companies to invest in them.

As much as realty companies would love to be in that situation, it is far from the truth. 

Realty companies face just about as much challenge raising capital as others. Some would argue that it is even more difficult to raise institutional capital because the sector has not been given industry status.

Despite the challenges faced by the developers in securing funding, nearly 35 per cent of it is added to the cost of a house by way of taxes and levies by the government. Urban land bodies and state governments together levy a variety of taxes in the form of registration, value added tax, service tax, developer agreement stamp duty and others.

There is constant pressure on cost because of the rising cost of input and cement prices in particular have been a worry for all construction companies. Getting working capital funding from banks is easier said than done.

With affordable housing projects being such a challenge to execute within the stipulated time and budget, it is a critical need of the hour that state governments take a fresh look at their priorities to rationalise the taxes on the real estate sector.

The demand to the government is not without precedent. During the 1990s, it took nearly five years for the mobile phone industry to get a million subscribers because the government levied a fixed licence fee from the telecom operators. When it changed to a revenue sharing formula after the New Telecom Policy in August 1999, the industry changed the face of India’s telecommunications industry. With a billion subscribers and over 400 million mobile internet users, India was adding 18 million subscribers at its peak every month! With a smart positive move in the 1990s, India is now ready to take its leap into the mobile digital dream.

The government’s policy of ‘Housing for All by 2022’ could follow that model too. The government needs to appreciate that the industry would want to make sure that its policy can be achieved and if both can join hands it can be a win-win situation for the people too.

Early signs of a seismic shift in banking are already being witnessed after the issue of new banking licences, payment bank licences and quicker integration of technology with banking. Many argue that the process is already underway and telecom and banking grip each others’ hands firmly and the pace of change could accelerate in the days ahead.

For the realty industry, several related developments may also be worth making a note of. All of this could help change the housing scenario in the country like never before. Better practices that enhance quality of construction and help turnaround projects faster are already available in India. Recent news reports suggest several realtors from Madhya Pradesh recently visited Delhi to take a firsthand look at the facilities of a company in Delhi. As companies face a shortage of quality construction workers, pressure of deadlines for delivering a project and seasonality worries, technology could come to their rescue.

Wider adoption of precast technology for realty projects will help in easing some of the pressures on realty companies. The pace at which precast technology helps cut down execution time is a great boon for companies and helps cut down on their operating capital cost. As the technology is adopted by companies outside the big cities, it will cut down the project time considerably.

Very soon, a regulator will be in place in every state to protect the consumers’ interest. Some states have started making the announcements and the tempo is expected to pick up.

It is now that the government needs to give a push to rationalising duties and taxes so that the policy dream can be achieved. Meeting a goal like that of providing housing for all is best done with the industry walking hand in hand with the government.

RERA: AN EXTENSION OF CONSUMER PROTECTION ACT?

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States need to set rules of business in the interest of the consumer

The road has been paved for setting up of the Real Estate Regulatory Authority (RERA) after the Parliament approved the Real Estate (Regulation and Development) Bill. The nod from the Parliament has set in motion a time bound process and each of the states now have a fixed time to frame the rules for the Act and set up RERA, the regulator for the real estate sector.

RERA has been set up to regulate the stupendous growth that real estate has seen across the country over the last 10-15 years. The action now shifts to the states which will have to stick to the timelines as suggested by the new Act. State governments will have to frame the rules for the Act and constitute the Real Estate Regulatory Authority, with which real estate companies will have to register their project. There is an elaborate retinue of rules under the new Act that have to be followed by the real estate companies, failing which fines could be levied upon them.

A regulator's job is to ensure the interests of the industry is kept in mind along with that of the consumers so that there is equilibrium between the two. 

While the intention of setting up the regulatory body is noble, it has added to the uncertainty for the real estate sector. In the form that it has been legislated, the Act has ended up being an extension of the Consumer Protection Act, with a little more bite, perhaps. 

The regulator getting some teeth is welcome because if the provisions were to be fairly implemented, the companies which fail in the standards for commitment to the consumer could fall by the wayside. It may not take very long for that to happen because in the case of delay in possession, if the case is brought to the notice of the adjudicator, it will have to be disposed off in 60 days. It may be pertinent to remind here that consumer courts are also supposed to dispose off cases in a time bound manner.

While the resolution of complaints now has a deadline looming large, the companies have not been lucky. Getting government approvals can be a nightmare and, in some cases, can take 2-3 years before all the retinue of paperwork is completely. 

The Act has not made it mandatory for the government agencies to ensure timely clearances, leaving the companies in a precarious situation battling government agencies and ensuring the deadlines are met for consumers. So, for nearly 20 regulatory clearances that any project has to get, it is mandatory for the clearance process to be completed within a stipulated period.

If there is a delay on the part of the company, they stand to be fined for it, if a customer decides to knock at the doors of RERA.

The ongoing projects are also to be brought under RERA’s purview, something that could add to the uncertainty and confusion. States will have to tread cautiously on this because a stringent approach toward this could lead to litigation and, ultimately, lead to further delay in handing over the completed projects to the buyers.

When the states sit down to finalise the rules of business, it could be good to formalise a few things in the interest of people. When real estate companies deposit the monies owed to the government as external development charges that are often not spent for the purpose that it had been paid. Instead, sometimes city corporations or governments spend it for needs that may be more urgent, depriving the local community of their rightful funds for their local needs. Clearly stated rules of business will improve transparency in spending of the funds will only make buyers happier.

State governments could perhaps raise the bar by creating an escrow account where these funds could be deposited. These funds could be withdrawn only for the specific purpose for which they were collected. 70 per cent of the funds could be deposited into the escrow account. If the rules of business make this mandatory, states will be able to ensure consumer interest is served.

These measures could improve the transparency on behalf of city municipal corporations or local governments. Buyers will surely benefit from such a move. If the government agencies can help complete their part of the work in time, it will help companies be more transparent with their work too, helping the industry and consumers, in turn.

Perhaps, in a tight and consistent regulatory environment, it will be difficult for the non-serious companies to survive and the industry might see some of them being pushed out as part of the natural process.

Real estate in India has not been given the status of an industry in India. Therefore, often its views are not taken into account during formal processes where its welfare and growth are being discussed and regulated.

If the government were to be on an overdrive to improve the ease of doing business, land use for a specified purpose must be pre-notified so that there is no delay at all in securing all the approvals before construction work can begin. The industry has always been keen to work in the interest of the consumers. We need the government to take the extra step to walk ahead, together.

Will the Warehousing & Leasing Segment be the Saviour for Realty?

Suddenly, everything seems to be pointing to a potential surge in Real Estate sector. Monsoon, FDI, GST, REIT, 9th Pay Commission, ... everything seems to be only pointing to an unprecedented growth in realty. 

And what a change it highlights: From a situation of "nothing is right" for the sector as of Yesterday to Today's "everything is bright and sunny", the change in perception is quite drastic.

And if these are perceptions, so what is the reality? Quite the middling path actually. Things weren't as bad yesterday and aren't as sunny as today.

For quite some time now, the real estate sector has been looking for a lifeline. The downturn, lack of funds, Issues with overcapacity and under sales in the erstwhile growth-hubs, as well as falling prices have left the sector gasping for breath. It is a sad situation for the industry which once was touted as the sunrise sector along with education.

So will all the above inputs really impact the real estate sector’s fortunes in the immediate term? Not really!

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Yes the growth will come from FDI, REITs and others, but only in the longer term.

Surprisingly, the sector, which has mostly been judged by the volumes in the residential segment, is suddenly getting a boost now from a surprising quarter: Warehousing and Logistics(W&L) segment. The numbers that have been forthcoming in this segment are staggering and have the potential to really spur the Realty sector. 

I'd like to believe that the real triggers for growth for W&L segment are the Government programs like "Make in India" and "Infrastructure Development projects", but in reality I see not enough traction from these segments as yet on the ground level.

Surprisingly, the catalysts are from two "unlikely" segments - Retail(or e-Retail, to be precise) and the recent GST announcements.GST is spelt as the real game-changer for the W&L segment with the biggies in the segment already talking about expanding capacities. Both of these combined by the impetus provided by Railways which is talking about humongous investments in the W&L segment in the immediate future, are suddenly being seen as good news for the real estate sector.

The sheer investments envisaged are mammoth and can actually make the sector seem attractive to investors too. The high growth optimism is already attracting both foreign investors as well as PE firms, sensing a vast opportunity in the growth momentum.

And there are reasons why the investors are finding this segment more lucrative than the other segments. There is a huge volatility associated with the residential segment, which is not there in the W&L segment. The stability of the segment and huge lease potential is also a sure winner for a risk-averse REIT.

According to some numbers I have read, the demand in W&L segment is expected to touch 125 m sq ft in the coming 5 years. The optimism could actually become an understatement, if the indications that the Government will allow 100%  FDI in eCommerce actually come true.

"Make in India" will also spur the Manufacturing sector demand and the requirements for the segment will increase many-fold. 

And with the growth in the segment, the eventual beneficiary will be the real estate sector. The W&L segment could well be the one thing that can re-write the real estate growth story!