Promising the Skyscrapers: Jaypee's Corporate Debt Burden

There was a showdown yesterday in our neighborhood yesterday. About 4000 homebuyers staged a protest against the Jaypee Group for its failure to deliver their apartments on time.

The anger and rustration of homebuyers is undertandable. Having been promising a "Wish Town" with sprawling lawns, gold courses, playgrounds and various other amenities , and having invested  their life savings to buy a home of their own, they are now being left in the lurch. Apartments that were to be handed over in 2011 are still undelivered. Across the expressway, a vast array of unfinished apartment complexes can be seen on the horizon -- empty shells of brick, cement and concrete, with no sign of life, or work-in-progress.

A number of protests have been taking place from time to time. The last one led to a blokage on the expressway, and this one was aparently triggered by a decision in the High Court. The Allahabad bench of the National Compaly Law Tribunal (NCLT) admitted IDBI bank's insolvency plea pertaining to Jaaypee Infratech. The company had failed to repay a loan of INR 8500 Crores (USD 1.3 billion).

Behind the anger and frustration of the homebuyers is the larger picture of Corporate Debt in India. Thanks to poor internal controls, bad debts in Indian banks has shot up to INR 7,00,000 Crores (USD 109 billion) over the last two years. In order to defaults companies have been on fire sale of assets: Reliance Communications (RCom), which had debts of over Rs 47,000 crore sold its tower business to escape default default, the Ruias have sold their oil refining business to Rosneft, GMR and GVK parts of their airports and power businesses, and Vijay Mallya parts of his liquor businesses that were mortgaged to fund Kingfisher Airlines.

Jaypee group’s debt is over Rs 75,000 crore (USD 11b). So, according a report in the Hindu:

"... the group has agreed to sell its 20mtpa of cement assets to Kumar Birla-led Ultratech for Rs 15,900 crore. This will leave its listed entities with about 6mtpa of cement capacity, three thermal power plants, one hydropower plant, an expressway project and land parcels. It is looking to sell most of these assets at the right price, but buyers are not easy to come by. Aside from selling stake in its land parcels and the Yamuna Express Highway, the group is looking to sell its remaining cement plants for Rs 4,000 crore and its Bina thermal power plant for Rs 3,500 crore. In the last year, the group has defaulted on payment obligations worth $350 million. Analysts say its capacity to service its debt has not improved."

No wonder there are few takers when the Jaypee Group boss, Manoj Gaur, tries to tell the homebuyers that their "investment is safe".

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LINKS & REFERENCES

* (2017) - http://www.hindustantimes.com/noida/noida-authority-jaypee-tell-homebuyers-not-to-panic-assure-their-money-is-safe/story-nYjtbZb1bR6tzfYbZitI2N.html

Jaggi on the slowdown (30may17) https://swarajyamag.com/economy/not-just-demo-pm-modis-black-money-chase-is-x-factor-in-growth-slowdown

(2017, May) Financial Express - http://www.financialexpress.com/industry/banking-finance/demonetisation-impact-bank-npas-mount-to-rs-614872-crore-set-to-rise-further/558916/
- They now constitute 11 per cent of of the gross advances of Public Sector Unit (PSU) banks. In all, the total NPAs including both the public and private sector banks were Rs 697,409cr in December 2016. These figures were compiled by Care Ratings.

 - 31 May - Reliance Defaults -  https://www.bloombergquint.com/markets/2017/05/31/an-ambani-default-won-t-fly
Andy / Bloomberg - http://m.economictimes.com/industry/banking/finance/banking/at-this-rate-fintech-will-slaughter-indias-banks/articleshow/58782969.cms

The Hindu- http://www.thehindu.com/business/Industry/the-biggestever-fire-sale-of-indian-corporate-assets-has-begun-to-tide-over-bad-loans-crisis/article8573163.ece

The Price of Land in India

How is it that India has some of them most expensive real estate in the world?

Intuitively it might appear only logical that land is a scarce resource in country of 1.2 billion people. Yet, in terms of density of population, India, at 380 people/sq.km, is nowhere near the top. Singapore leads this list over 7300/sq.km, and among larger countries, we have Bangladesh at 10324/sq.km.

Among major cities, the price of land in Mumbai, for instance, is around Rs. 250 Cr/ Acre (~USD 42m). This puts it in the league of with some of the most densely populated cities in the world like New York and Tokyo.  Similarly, rentals in Delhi's Khan market at Rs. 1225/sq ft/month is among the most expensive retails spaces in the world.

If you thought this was a purely urban phenomenon, consider farmland prices in Punjab. At Rs. 1.5 Crores/Acre (~ USD 251,190), it is 230 times more than the cost of farmland in the wheat bowl of USA - Kansas. In terms of agricultural productivity Kansas beats Punjab hands down. The economy of scales that have been achieved through huge farm holdings (average - 707 Acres) is in sharp contrast Punjab (10 Acres!).

So one thing is clear -- the price of land in India is not based on productivity. Even the most expensive cash crops produced in Punjab would not account for the cost of the farmland on which they are grown. Why, then, have the price of land shot-up over the last ten years?

This was the topic of discussion at a seminar organised at IIC last week. The discussion centered around a book written recently by Sanjoy Chakraborty. He went through the history of 'giving' and 'taking' of land by government through the exercise of 'eminent domain'; compared the productivity based price of land in different parts of the world and criticised the new Land Acquisition (LARR) Bill, as something that would only muddy the waters even further.

However, the mystery of sky-rocketing real-estate prices, remains an unsolved investigation-in-progress. In the absence of reliable data, the speculation was that a combination of factors is responsible for this:

* Numerous, Archaic, Conflicting Laws: The Land Acquisition Act, 1894, is often at loggerheads with 16 Acts with provisions for acquisition of land in specific sectors like railways, roads and SEZs.
* Discretionary Powers: The confusion in laws gives ample space for politicians and bureaucrats to use 'discretionary powers' -- a valuable tool for rent-seeking and election financing. It seems 80% of criminality in India is centred on land.
* Influx of NRI funds: Real estate has become an important destination for investing remittances from non-resident Indians. The flats may remain empty and the beyond the reach of the locals, but, hey, who cares?
* Money laundering: The existing tax structure ensures that unrecorded cash transactions play an important role in this business. So it has become the meeting point for money of all colors and hues - black or white, through petro-dollars or blood-diamonds.

In the ultimate reckoning we ourselves are to blame for this state of affairs. Perhaps at the centre of this tangled web, sit apathetic citizens and their petty political leaders who are unable to envision a country beyond the next elections.

After all, as Maistre said, "In a democracy, people get the government they deserve."
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Other tidbits:

* Average Land-Holding: In India, the average size of land-holding is 3 Acres. The smallest holdings are in Kerala (1 Acre), and the largest in Punjab (10 Acres). This is one of the lowest in the world: France (100 Acres); USA (450 Acres); Brazil (600 Acres)


* When did we lose the fundamental right to property?   --- The Constitution originally provided for the right to property under Articles 19 and 31. --- The Forty-Forth Amendment of 1978 deleted the right to property from the list of fundamental rights --- http://en.wikipedia.org/wiki/Fundamental_Rights_in_India

* What are stylised facts??   ---- Simplified presentation of emperical finding --- http://en.wikipedia.org/wiki/Stylized_fact-

* Why is Magarpatta being cited as the ideal story for a Town Planning Scheme  ??
* Dalal, Sucheta (2007): THE AMAZING STORY OF MAGARPATTA -- http://www.rediff.com/money/2007/jan/11bspec.htm -- Interview with Satish Magar
* Magarpatta - slides -- http://specials.rediff.com/money/2006/mar/22sld1.htm

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REFERENCES & LINKS

Chakraborty, Sanjay (2013): THE PRICE OF LAND, OUP-India, March 2013 --- http://ukcatalogue.oup.com/product/9780198089544.do

http://www.epw.in/special-articles/new-price-regime.html

http://www.indianexpress.com/news/khan-market-in-new-delhi-mumbai-s-linking-road-among-most-expensive-retail-locations/1033355/0

Kansas - average farm size -- http://www.agclassroom.org/kids/stats/kansas.pdf

http://www.dnaindia.com/india/1533062/comment-how-corruption-has-been-eating-into-our-land

Eminent Domain -- http://en.wikipedia.org/wiki/Eminent_domain

http://en.wikipedia.org/wiki/List_of_cities_proper_by_population

House Hunting

This weekend we set a new record -- the largest number of houses checked in two days.

We had started at Sector-22 in Dwarka. This is at the far end of the new township, an area where the Metro is yet to reach. Here you have large swathes of land that have been earmarked for various ambitious projects - a new Inter-State Bus Terminal, A Metro Terminus, an International Convention Centre by DLF (Sec-24), a new diplomatic enclave (Sec.), etc.,


We visited three apartment complexes - Vasudhara, JP Society, Guru Ram Das Apartments. All these looked fully completed but, strangely, there was nobody around except for a couple of bored guards.

It turned out that more than 50 building-societies are under investigation by the CBI for a range of illegal activities. A former Registrar of Coop Societies (Mr. Diwakar) was under detention for selling away plots to unauthorized builders -- a scam worth Rs.3000 Cr; In JP society, housing units had been sold to multiple buyers; in Kailash Apts., the original allotees were locked in a legal battle with folks who had purchased the property on a "Power of Attorney"; another builder in Sec-22 had constructed extra blocks in an area earmarked for a community park.

Dwarka is a mess waiting to be sorted out. Maybe we should be looking elsewhere...

NOIDA (27 October 2007)

• 3BDRs are going for 50-65L these days in Sectors 50, 51, 105 and 82

• In UP, houses are sold only on as Leasehold properties for a period of 99 years. Transfer of property is possible only after it has been formally registered in a persons name. It is not enough if a new has been 'alloted' to a person. He has to have it registered for any further transactions.
• Noida Development Authority (NDA) has built HIG flats in Sectors 61, 82 and 105. These are low-rise apartments but have no power back-up, club, landscaped surroundings or swimming pools that are de rigueur in most of the new private apartment complexes.
• Brokers hide as much as they reveal: They usually charge 2% of the total transaction cost (excluding, perhaps, the registration costs). Nearly all of them are a picture of earnest sincerity. They claim to have your own interest uppermost on their minds. But they do not tell you many things upfront. So the questions to ask are:

* Are they registered with the government authorities?
* Are they selling properties that carry proper registration papers?
* How much does the seller want in cheque (bank loan) and cash (aka 'black money')?
* Is he picking up something from the Net and rehashing it for you (like Sandeep Goel did for the 3F propoerty at Sector-105?)
* How much is the earnest money required by the seller to hold the property in your name ill the registration papers are finalised?