RBI concerned over flawed SEZ policy

India's central bank, RBI today flagged red for SEZ policies. Earlier I had reported about RBIs concern over real estate bubble in India. At first it was the Finance Ministry which crying over loss of revenues because of industrial relocation to SEZs and now RBI has made it clear that it is not in favor of the SEZ policy in its current state.

RBI in its report has expressed concerns over "uneven pattern of development as they may pull out resources from less developed areas". We had emphasised on the same in our blog post and our exact wordings from the post are "...They had a much better policy in place on developing under served regions by attracting foreign investments..."

RBI also points out that revenue implications have to be factored in. The Finance Ministry has estimated that SEZs could run up a revenue loss of Rs 1,75,000 crore in direct taxes, custom and excise duties over the next five years to the exchequer. However, Commerce Ministry is defending that SEZs will generate Rs44,000 crores to the government.

SEZs still have a long way to go and the policies that exist today are not in the overall interest of the Indian economy but only in the interest of the rich.

RBI India , SEZ Policy India

SEZ India ,
RBI India

Maharashtra's MIDC plans Power SEZ - Good Move

Maharashtra government controlled MIDC plans to setup a 1250MW Power SEZ in Raigad district of Maharashtra. The project is coal based power generation with an initial capacity of around 1250MW. Private players may alos be roped in but as of now its a MIDC venture. These are the kind of projects which need emphasis and not SEZs in Mumbai or Bangalore.

Power Industry ,

Best Policy is not to have any SEZ - Dr.Pant

Dr. Manoj Pant, Professor at the Centre for International Trade and Development, JNU(Jawhar Lal Nehru University), New Delhi said in his report not to have any SEZ. Considering the recent spat between Finance Ministry and Commerce Ministry over loss of revenue, Land grabbing cases, and finally the SEZ approval process biased towards the first few applicants by capping and then removing the cap on SEZs have all embrolied the SEZ into a big controversial legislation which needs to be straightened out.

I feel that the economic policies in the 1990s were better with the government extending tax holidays and other concessions to develop the underdeveloped remote areas of India. While in case of SEZs the concentration has mainly been in the metros and developed industrial areas plus more benefits than in the 1990s.

What are India’s principal exports of manufactures and services? These are gems and jewellery, textiles and clothing, automobiles and parts and IT services.

Yet, all these exports are coming out of naturally developed clusters in areas like Chennai, Bangalore, Tirupati, Delhi and Surat. In IT, for example, there is no evidence that the government did anything special to develop the Bangalore or Delhi clusters.

Prof. Pant adds that,
A good trade policy is one which is trade neutral: it gives no special preference to either exports or imports. The SEZ incentive scheme violates this provision. A survey of incentives for FDI in South Asia done by this author (International Studies, vol.43,no.1,2006) illustrates this point. No country in this region has calculated the cost-benefit of giving incentives to FDI and these incentives might often cost more than the benefits from the activity.

There is an additional problem. Given the enormous economic incentives available to units in SEZs, there would be an incentive for existing units to switch locations. The government move to prevent this makes no sense: why should incremental exports be given preferential treatment?

Absolutely Correct!!! Look at how our neighbors opened their SEZs, sure we need not copy, but can you read this - "In 1984, China further opened 14 coastal cities Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai to overseas investment" They had a much better policy in place on developing under served regions by attracting foreign investments. How many of the SEZs cleared in India have FII or overseas industrial participation ? Where is the cost advantage in setting up an SEZ for a MNC like Apple Computers or Ford Motors? They are getting tax benefits, duh! Hope our FM is listening ;-)

Indian Economic Policy ,
Foreign Investment in India

DLF IPO Scandal - Part 2

Read Part - 1 of the DLF IPO Scandal below before goign through this.

Excerpts from Draft Red Herring Prospectus of DLF Universal, page 426, Promise vs. Perfomance - it is written that there was a right issue of debentures in 2005 and object of right issue of Rs 35 crore was to raise funds for increase in business activities.

Promise vs. Performance - Last Three Issues
The last three issues of securities, to public or existing shareholders, made by our Company are as follows:
(a) Rights issue of debentures in fiscal 2005 ;
(b) Rights issue of equity shares in fiscal 1989 ; and
(c) Public issue of redeemable debentures in fiscal 1983.

We had not made any projections in the offer documents for the rights issues made in fiscal 2005 and fiscal 1989 and for public issue made in fiscal 1983. The object of the rights issue made by our Company in fiscal 2005 was to raise funds for increase in business activities and to finance implementation of new projects.

This amount was collected in Jan 2006. At that time in company’s book there was Rs 3.5 equity capital and more than Rs. 350 crores as reserves.

In October 2005 all the lead managers were in touch with DLF universal planning for Rs 10,000 crores($2 Billion) mega IPO and were knowing that there was no need for Rs 35 crore. But greed took over the brains of these criminals and they did not want minority shareholders getting their 2.5% legitimate quota. They wanted owners stake to go upto 99.5% so that they get maximum valuation and no selling pressure so they conspired right convertable debenture offer. They could haave offered 70:1 bonus and results would have been the same. This is the reason the lead managers are showing May 10th 2006 as the date on which company gave authority to give due diligence certificate, and they gave the same to SEBI on the very next day May 11th. (It is common in corporate India to shake hands with the promoter group 6-12 months before the IPO)

The Midas Touch investors’ association has a different allegation. It has written to SEBI saying that DLF’s Earning Per Share (EPS) stated as Rs 12.84 is misleading and it ought to be Rs 1.32 as per Sebi guidelines.

Excerpts from Sucheta Dalal about DLF Universal IPO,

Things have changed a bit since the media predicted stratospheric valuations for DLF and its Rs 60,000 crore land bank. The market is volatile and shaky and the very institutional investors who were hot on the chase of realty investments are now using their clout to beat down valuations. In a booming capital market and in the midst of a realty bubble, DLF may manage to fend off these charges and even get a clearance from the MCA, but it doesn’t bode well in the long term if the company is seen as one that does not care about its minority shareholders.

If the company is allowed to get away with this, it would make a mockery of investor protection rules. Worse, it would encourage more companies to delist shares, restructure capital and go public again—always at the cost of minority shareholders.

ET reports that DLF has agreed to provide a separate quota during the mega IPO for those 1200 odd investors who held the stocks even after delisting. This is subject to approval from SEBI. This only means that DLF morally agrees to the fraud and crime it has committed.

DLF , Building Retail Space- Looting Retail Investors ;-)

DLF India IPO ,
India Real Estate ,

DLF IPO Scandal - Part 1

DLF, the name sounds familiar ? Ofcourse. In short DLF is a shady company with shady operations and shady promoters. Well how can you expect realtors in India to be a transparent business house like Infosys ;-) Good Point. So by now you have realized and agree that Indian real estate market is all about black money :-) OK. Enough of this, justify the DLF scam.

DLF was a listed company until 2002-03, and the market value of each paid up share of Rs 10/- was Rs 88 /- as on 30-SEP-2002. In 2003 , its promoters increased their holding beyond 90%, admittedly in violation of SEBI's takeover code. DLF admitted to the lapse, paid a fine of Rs 5 lakh. DLF knew that the penalties in the Indian capital markets are much lower than the extent of scam the promoters and brokers conduct. Mere Rs5 Lakhs.

DLF then made an open offer to the public at Rs 320 per share to buy out minority shareholders and went private. The promoters of DLF today own 99.5% of its equity. The remaining 0.5% is held by investors who chose to stay on when DLF delisted the shares. Around 1,308 shareholders chose to hang on to their shares. Such shareholders invariably lose many of the privileges available to investors of listed companies, but since DLF intends to raise public money again—that too within three years of its September 2003 delisting—it cannot get away by leaving residual shareholders cheated.

Residual shareholders complain that the company made a rights issue of partially convertible debentures in a 1:1 ratio last year, but omitted to post the offer letter to 90% of the minority investors. The lucky 10% who got the letters & other means and will profit enormously are all closely connected with the company. These debentures have since been converted into 10 equity shares each. Further, the company made a bonus issue in the ratio of 7:1 and then split the face value of shares to Rs 2 each. Those who did not get the rights offer were thus deprived of 400 shares each against each share held on the record date. Since the promoter holding is 99.5%, it is clear they did not want to share the bonanza emanating from their massive capital restructuring exercise with the 1,100 investors who clung on to their share holding.

DLF’s vice chairman Mr Rajiv Singh insisted that the Offer Letters had been posted and that investors failed to apply for debentures because they did not see value in the company. But the company took care to build-in serious disincentives. The partly convertible debentures carried a 2% interest and were to be convertible anytime over the next 20 years. The letter also made the misleading claim that the company had no plans to re-list its shares on the stock exchanges. Naturally, minority shareholders have written to Sebi alleging breach of trust.

DLF may manage to fend off these charges and even get a clearance from the MCA, but it doesn’t bode well in the long term if the company is seen as one that does not care about its minority shareholders.

The DLF had offered the minority shareholders unsecured convertible debentures of Rs 100 each on rights basis in December 2005. The letter of offer were sent or not sent to the shareholders under UPC on December 23, 2005 mailed by an independent licensed bulk mailing agency is still under investigation. It all resulted a loss to minority share holders numbering 1308 to the tune of Rs. 1600.

DLF Building India - By Looting Small Indian Investors.

Stay tuned for Part -2

DLF India IPO ,
India Real Estate ,
Realty India

SEZ - Special or Scam Economic Zones ?

Ever since the act has been passed, industrialists( aka land brokers ?) to politicians are pouching land as if their is no tomorrow. Wonderful line from the Business Standard report,

Industrialists in search of acquiring vast tracts of land grows, so do the dissenters who call them 'Special Expenses Zones'- an easy opportunity, it's alleged, for favoured robber barons to profiteer through property development.

Indian Land Banks ,
India Scam

Bharat Forge & MIDC form a True SEZ alliance

Being a strong advocate for manufactuing and industrialists, I find this announcement as the best so far. India's largest automative ancillary manufacturer, Bharat Forge of Pune has signed a MoU with MIDC to setup a 2000 crores manufacturing SEZ near Pune in Khed.

The real purpose of SEZ which was initially architected by then industries minister, late Shri Murasoli Maran(Father of current IT Minister Dayanidhi Marn) is to promote large scale, low cost and efficient manufacturing to cater to the demands of global market. Bharat Forge-MIDC SEZ is headed in that direction.

Bharat Forge, CMD, Baba Kalyani said that,

"Initially the SEZ will be spread over 2,000 hectares, we will like to expand it to 5,000 hectares and the state government in principal has agreed to our proposal"

Kalyani a true visionary who has built Bharat Forge from scratch also said that

"There is shortage of around 15,000 engineers in Pune and this will be doubled by next year. An engineering college will be set up in the SEZ in association with Warwick University from Britan to overcome this problem"

Hopefully it will remain a TRUE manufacturing SEZ and not get itself converted into real estate saga. SEZ should just chant Manufacture-Exports, Manufacture-Exports!!!

Wall Street Down on weak housing numbers

Wall Street ended its winning streak after a report on weak housing numbers was out. The report from the National Association of Realtors that sales of previously owned homes dropped in July to a pace of 6.33 million units, the lowest since January 2004, erased a moderate early gain on Wall Street.

Yahoo! has an exclusive section of falling real estate prices and how desperate realtors and realty speculators are to sell their houses.

Incidently Realty stocks on the Indian bourses have also crashed today.

JP Morgan raises $360 Million India Real Estate Fund

JP Morgan which downgraded India just last week has quietly raised $360 million through its India property fund. The fund is the first of its kind by a FII to invest in the Indian Real Estate sector.

The objective of the fund is to team with local developers in New Delhi, Mumbai, Bangalore, Kolkatta, Chennai and Hyderabad. he fund might also invest in emerging cities like Mysore, Jaipur etc. Joe Azelby global head of JP Morgan Real estate said that,

India is experiencing extraordinary growth in real estate demand and is arguably one of today's most compelling real estate investment opportunities. Investors are now seeking higher returns from emerging markets like India where there is enormous potential for growth and superior returns.

Very interesting, JP Morgan Equities downgrade India while their counterpart in Real Estate is upbeat on India. Morgan brothers, if Indian industry won't do well will it's real estate ;-)

JP Morgan India ,
India Real Estate Fund

Government tightens SEZ Rules. Good Grief!!!

The Government on the recommendations of Finance Ministry issued an order stating that existing corporate cannot relocate their units into SEZs to avail the Tax sops. They have clarified that, corporates have to make fresh investment in plant, machinery and human resources to operate the units from SEZ. Anbody failing to oblige, stand to be disqualified and their SEZ license cancelled. What ? Has that ever happened in India where corruption is the order of the day ? Well it's true that Babus and Netas are the watchgurads but this time they are facing resistance from within the government, the finance ministry.

In a separate development, Business-Standard reports that, SEZ board has taken a tough stand on land acquisition. The board has asked the Maharashtra government to take a second look at 10,000 hectares of land acquired by Reliance Industries. And why not at the land being acquired by Reliance in Haryana and Punjab at fraction of the costs to ruling market prices ? The board is also considering not to issue any permissions for IT SEZs because more than 70 of 150 in the first lot have gone to the IT sector. Don't worry land grabbers this time will come with Biotech applications to grab the land.

The whole idea of SEZ should be carefully re-taught and re-architected for the benefit of the economy and the nation.

SEZ limit in India to go beyond 150

Union Minister of Commerce and Industry, Kamal Nath told that the SEZ limit may go beyond the initial 150. Kamal Nath further added,

When the limit was set, we had decided to review the situation once we reached
the 150 mark. The SEZ Act does not put any limit to the number of SEZs that can
be set up across the country.

Their is a severe demand for SEZs in the country due to the tax exemption they get. Meanwhile the government is busy framing rules on the establishment of schools, malls, housing complex, hospitals and otehr establishments within the SEZ area. I would like to see atleast 50% of the area be strictly reserved for manufacturing and export oriented units.

Recall my earlier post that SEZ should be used to manufacture and compete at global levels because of the heavy incentives they are enjoying and SEZs should not be and never be treated as land banks and real estate activity in SEZs should be strictly banned.

World Famous speculator joins Indian Realty Boom

World Famous Currency and Stock Market speculator, George Soros is busy mopping up stocks on Dalal Street of companies operating in the Indian Realty and Infrastructure sector through his Quantum Funds.

George Soros through his Quantum fund has invested in the following Indian companies,

• Unitech - Rs200 crores
• GMR Infrastructure - Rs70 crores
• Anant Raj Industries Ltd - 1% equity at Rs680/Share from secondary market. Confirmed by Amit Sarin, Director Anant Raj Industries Ltd (ARIL).

Here are some facts about the Indian Real Estate Sector. Note that George has a history of making money within a short time. George Soros is not an investor but a speculator. He doesn't care if the country's economy will collapse and is willing to go to any extent to protect his investments.

George should have read my article about RBI's concern over real estate bubble in India. Only time will tell if George Soros will be another Kerry Packer of Himachal Futuristic Communications Ltd(HFCL) or a reall winner.

Google to operate from Indian SEZ

Google, the best search engine, is planning to set up back-office operations at a special economic zone in Andhra Pradesh. Government officials said Google’s investment into the venture could be as high as $1 billion. Google's operations, will be spread over 1 million sq ft, comprised one of the foreign investments into an SEZ cleared by the Board of Approvals today.

Dell’s investment is also likely to be made in Andhra Pradesh, while Accenture is likely to make its investments in Karnataka. AMD, Cisco, SAP, Intel, and Microsoft also committed $1billion-plus investments in the SEZ.

State government representatives who attended the BoA meeting said the proposals of several top Indian information technology firms for setting up SEZs were also cleared, including two zones of Infosys in Pune and Mysore, and proposals of Wipro, HCL, Cognizant and NIIT. A knowledge city being set up by Technocrats in Bangalore was also approved.

A total of 45 cases were cleared, taking the number of approvals since the Act was passed to 150, the limit set by the empowered Group of Ministers on SEZs.

With over 100 cases pending and 80 cases deferred at today’s meeting, the commerce ministry is expected to request for an early decision on the future strategy.

Suzlon’s proposal for setting up non-conventional SEZs in Gujarat, Karnataka and Tamil Nadu was given an in-principle approval, since the land for these zones is to be tied up.

Vedanta’s proposal for an SEZ in Orissa also received an in-principle clearance, while Essar’s multi-product zone at Jamnagar, and Mahindra Gesco’s biotechnology zone at Thane was also cleared.

RBI concerned with Real Estate and SEZ Bubble in India

India's central bank, the Reserve Bank fo India expressed concerns over rising property prices in India. The property prices have doubled and in some cases tripled in just a span of 2 years. RBI has raised interest rates twice to cool the overheated property market. RBI has also raised the risk-weighting of housing loans to 150% to discourage bank lending, and has sought to keep out foreign venture capital funds wanting to get into Indian real estate.

However, the bigger bubble might arise somewhere else - SEZs. The Government has allowed some land(50%-75%) in every SEZ to be used for housing, schools, malls and entertainment. Reliance Industries, for instance, is the main partner in twin SEZs coming up at Navi Mumbai and Maha Mumbai, with a combined size of 35,000 acres. The phase I investment alone is reckoned at Rs 5,000 crore, and the ultimate investment has been estimated at Rs 50,000 crore in seven years or so. Reliance is also planning a separate IT SEZ which will also house all the corporate officers of Reliance Mukesh Group.

Adani group is also setting up an SEZ at Mundra, covering 30,000-35,000 acres, and it proposes to invest Rs 7,300 crore on infrastructure. The SEZ aims at a total investment of Rs 70,000 crore (including that by export units) over 10 years. DLF SEZs are coming up at Ambala (2,500 acres) and Gurgaon (19,880 acres) while Unitech plans one at Sonepat (10,000 acres).

I can shout at the top of my voice that the aim of these SEZs is to promote exports and not land values. No country has prospered with just land banks / real estate without any industrial and manufacturing base.

India's export potential is much higher today, and so the build-up should be much faster. But can it really be fast enough to fill 388 new zones? Just the infrastructure cost of developing these could be hundreds of thousands of crores. What is the advantage that inland locations like Haryana will bestow on export-oriented units? Just for Reliance's own retail dreams. No. The going will not be smooth with falling quarterly profits and rising oil prices. If SEZ developers spend huge sums on infrastructure and are unable to attract enough export units, they will quickly run into a financial crisis arising from over-building. The SEZ bubble will burst, and it will be a large explosion which RBI and Finance ministry wants to avoid at any cost.

Financing the SEZ:
There is a danger here for small shareholders, bondholders and banks. Small shareholders are currently excited by real estate prospects, and will probably rush to buy shares in SEZ companies. SEZ promoters will seek to raise bonds and bank loans that are several times as large as their equity. Risks are higher for inland SEZs so weigh every option before you invest your hard earned money. Recollect IT specfic mutual funds that came in 2000 and went in terrible loss and were able to breakeven only in 2005. As a small investor, stick to SIP in diversified Mutual funds rather than sector specific investments.

Gandhi City - R&D SEZ in Bangalore

IT companies are teaming in Bangalore to form a R&D based SEZ, Gandhi City to be built on a 1,000 acres land. Neat idea. But the government must strictly enforce that companies operating in Gandhi SEZ must only do R&D and not operate a call center or do some application maintenance. Ivega one of the key backers of project hardly knows what R&D is. Check their website on what they do. So is this a new land grabbing scam from the first family of Karnataka - The Gowdas ?

Update on 20/08/2010: Comments were moderated because we do not know the authenticity of Comment Posters. However, you can create your own Blog and write anything you like about Balaji Subhash and I will link to it. Additionally, file RTIs against all the departments where Balaji Subhash deals and publish the findings.

DLF Postpones pre-placement before IPO

DLF the Indian realtor which is planning a mega Rs13,000 crores(USD 2 Billion) IPO had decided to defer its $500 million FII pre-placement. DLF insiders inform that the promoters are trying to patch with existing shareholders of the company who missed the debentures issue(or were they purposely made to miss the bus???) will be compensated in the IPO by means of some reserved portion.