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Unitech Case
Unitech Case
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The real estate sector is one of the most globally recognized sectors. It consists of four sub
sectors - housing, retail, hospitality, and commercial. The growth of this sector is well
complemented by the growth of the corporate environment and the demand for office space
as well as urban and semi-urban accommodations. The real estate industry encompasses the
many facets of property, including development, appraisal, marketing, selling, leasing, and
management of commercial, industrial, residential, and agricultural properties.
However, over the last few years real estate sector has often faced criticism for poor
corporate governance standards and lack of transparency.
DLF India
DLF (Delhi Land and Finance) was founded in the year 1946 by Chaudhary Raghvendra
Singh. It started with the creation of 22 urban colonies in Delhi. In the year 1985, the
company expanded into the then-unknown Gurugram, creating exceptional living and
working spaces for the new Indian global professionals.
The biggest blow for DLF has been the Supreme Court order in August directing it to
pay Rs 630 crore fine in a case related to abuse of market dominance. The penalty is a
little less than the company's annual net profit of Rs 646.21 crore in 2013-14
Following a petition by flat buyer associations of two DLF projects in Gurgaon - DLF
Park Palace and The Belaire – Competition commission of India (CCI) had in 2011
found DLF abusing its dominant position. The competition watchdog had imposed a
penalty on the company and asked it to modify apartment buyers' agreement. The
buyers had alleged delays in project completion and claimed there was an increase in
the number of floors over what was planned earlier. CCI said the construction of
additional floors without intimating the buyers was abusive of its dominant position
and needed to be curbed. The penalty was a huge blow to DLF's balance sheet as the
company has been selling its non-core assets to reduce its debt, which stood at over
Rs 19,000 crore at the end of June this year.
PROBLEM:
Abuse of its dominant position.
Illegal building of floors without prior approval.
Credit Suisse claims that there is "no transparency in the land acquisition process.
Promoters have privately controlled entities from which DLF buys land. Also, its
landbank disclosure in annual reports is inadequate."
They further noted that "DLF's dealings with the promoter entity have been
questioned by investors. In FY'08, DLF sold assets/real estate projects amounting to
Rs 5,560 crore to a promoter-controlled entity, DLF Assets. It also cancelled an
earlier sale of assets worth Rs 1,890 crore."
Previously, DLF has settled with minority shareholders who complained that they
were denied participation in the company's right.
PROBLEM: Lack of proxy advisory body
Shareholder value: Why did the stocks see an erosion?
DLF is one of the stocks which saw an erosion of 90.04% in its market value since January
2008, with the stock price declining from ₹ 1,150.60 to ₹ 114.65 in 2015.
The reasons for the decline of stock price could be attributed to both industry and economic
scenarios as well as lack of a proper corporate governance structure.
The rising interest rates did lead to plunging share values.
High debt.
However the major reason for loss of shareholder confidence was unfair fraudulent
practices of DLF. For eg: 15 Oct 2014 - Shares of DLF Ltd plunged 30% to a record
th
low, a day after the Securities and Exchange Board of India (Sebi) banned the real
estate developer and its chairman K.P. Singh from accessing the capital markets for
three years on finding them guilty of engaging in fraud and unfair trade practices. As
of June 2014, the company has a debt of ₹ 19,000 crore.
Sebi has penalized the entities on account of three key violations: non-disclosure of
related-party transactions, non-disclosure of financial details related to subsidiaries,
and inadequate disclosure of outstanding litigation.
This is an indication that no matter how big a company is, fraudulent practices will lead to the
downfall. Shareholder and stakeholders have the rights to fight for their rights and claims.
This is a god trend to see as we notice a rise in shareholder activism.
Source:https://economictimes.indiatimes.com/news/company/corporate-trends/dlf-unitech-
lack-in-transparency-key-disclosures-
report/articleshow/4052567.cms?utm_source=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst
OBEROI
INTRODUCTION:
The Income Tax (I-T) Department on Tuesday carried out searches at Oberoi Realty
group and its biggest vendor Capacity Infra projects for suspicious transactions,
including alleged purchase from dubious entities, receipt of ‘on-money’ and price
manipulation and cash deposits during demonetisation period.
Searches were carried out at over 30 locations in Mumbai, Delhi and Hyderabad by I-
T sleuths.
Oberoi, which has developed over 40 projects in Mumbai, is also being probed on
allegations of receipt of ‘on-money’ and price manipulation.
There is information that at least eight prime projects of the realtor in Mumbai and its
suburbs in which there is suspicion of difference between sale prices shown in books
and those of registered prices vis-a-vis payment received.
One of the residents of the project had lodged an FIR against Vikas Oberoi.
Accused the head of the Oberoi Realty of duping flat owners by delivering smaller
flats than what was promised.
Filed by Mohit Bhardwaj, a resident of Oberoi Splendour, a luxury project on
Jogeshwari-Vikhroli Link Road.
He claimed to represent several other flat owners, who have been fighting against the
developer for the last couple of years.
Not only the size of the flats was smaller, but the height of the ceiling was also lesser
than what was promised, among other things.
Amenities such as club house, swimming pool squash court, spa, party hall, jogging
park, tennis court, amphitheatre, camping site, plaza, landscaped garden, etc were
promised which were not given.
Buyers found out that the number of flats on each floor was much higher.
The mentioned graph depicts the fluctuation in share prices of Oberoi due to the
various events .
Shareholder’s value:
The Adarsh Housing Society Scam
Adarsh Housing Society, a 31-storey upscale residential complex in Colaba, Mumbai,
should have originally housed war heroes and war widows who lost their spouses
during the 1999 Kargil War. But the occupants of the apartment complex built on
defense land ended up being bureaucrats and relatives of politicians who were in no
way connected with the Kargil war.
Media scrutiny over the high-profile list of owners began in 2010, prompting the
Army and CBI to launch separate probes.
The CAG too submitted a report on the scandal.
It was found that the Navy had objected to the Maharashtra government according
permission for Occupation Certificates citing “serious security concerns” as the 100-
metre tall building stood next to a planned helipad and military installations.
It was also found that the society didn’t obtain a NoC from the Ministry of
Environment and Forests, and above all the society had permission to build only six
floors.
When Benami transactions were unearthed, the Enforcement Directorate joined the
probe. Maharashtra Chief Minister Ashok Chavan’s relatives, including his mother-
in-law, owned three flats, a fact that cost him the post of Chief Minister.
The probes also revealed that the society was granted permission when Mr. Chavan
was the Revenue Minister. Details obtained through RTI said Mr. Chavan approved
the sale of 40 per cent of the houses to civilians. (Flats given to civilians at Chavan's
behest: lawyer) RTI documents revealed that the children of several bureaucrats
involved in granting permission to the society owned a flat.
When the case came before the Bombay High Court, a shocked Bench called it “a
clear-cut manipulation by the Collectorate, the Revenue Ministry and the Urban
Development Ministry,” pointing out that “everyone who cleared the file was gifted
with a flat.” Mr. Chavan’s successor, Prithviraj Chavan ordered a judicial inquiry into
the scandal. As the inquiry was underway, several documents and files pertaining to
the scam went missing. This prompted the Bombay High Court’s intervention, which
ordered protection to the files and sought periodical status reports from the CBI.
Several occupants, including Admiral Madhavendra Singh, former Chief of the Naval
Staff, General Nirmal Chander Vij, former Chief of Army; General Deepak Kapoor,
former Chief of Army, offered to return their flats.
In 2012, the CBI arrested Pradeep Vyas, Secretary (Expenditure) of the Finance
Department of the Maharashtra government, making him the first serving bureaucrat
to be arrested. Twelve bureaucrats and Mr. Chavan were named in the CBI’s charge
sheet. Nine of them have been arrested so far.
Adarsh to be razed down
The Adarsh Commission constituted by the Maharashtra government in its report
recommended cancelling memberships of 25 owners who were found ineligible. The
list included current Railway Minister Suresh Prabhu, Mr. Chavan’s relatives and
Indian diplomat Devyani Khobragade.
The MoEF took serious note of the blatant violations in the high-rise and ordered
demolition of the illegally constructed floors. The Mumbai Metropolitan Region
Development Authority (MMRDA) cancelled the Occupancy Certificate and
eventually the power and water supplies were cut. The Adarsh society residents tried
every way, including seeking divine intervention, to stop the demolition, but in vain.
The Bombay High Court has ordered demolition of the building for violating green
norms. It has also granted 12-weeks interim stay heeding to the plea of Adarsh
occupants.
Governance Issues and Erosion oh Shareholder Values
The Comptroller and Auditor General of India (CAG) has said that the Adarsh Co-
operative Housing Society (Adarsh CHS) episode poses serious questions of probity,
integrity and ethics in public life and among public servants, which need to be
addressed by the polity and it also displays failure at all levels of governance.
It said that the case is particularly alarming as individuals across the governance
system at many levels have participated in this deceit and benefitted from it. The
public has trusted these public servants to safeguard its interests, but there is enough
evidence that they betrayed the fiduciary trust and acted against all norms of public
interest and probity, the report added.
In February 2000, Ramchandra Sonelal Thakur, a serving sub-divisional officer
(SDO) in the Defence Estates Office (DEO), Mumbai, in his capacity as chief
promoter of Adarsh CHS, wrote a letter to the chief minister of Maharashtra for
allotment of 38,542 square metres of land in Block VI of Backbay Reclamation
Scheme (BBR) at Colaba, for the construction of a residential building, for the
welfare of serving and retired personnel of defence services.
"The letter of the chief promoter (RS Thakur) would clearly indicate the knowledge
that the land was in the possession of the Army. However, the title of the land was
never transferred to the Ministry of Defence. As subsequent events would prove, this
fact of possession of land by the Army without holding the title of the land was
exploited in full, to misappropriate the land for private benefit," the CAG observed.
Shareholder’s value significantly was massively affected due to the following triggers:
( Source : https://www.businesstoday.in/magazine/features/challenges-for-unitech-
builders/story/13887.html)
Governance Issues
1. The practice of buying land from companies controlled by the promoters of the realty
majors, lack of disclosures on the acquisition process, as well as on the land banks,
which form the bulk of their assets
2. Promoters have privately controlled entities from which Unitech buys land
3. Unitech also does not disclose detailed accounts of all subsidiaries and has invested in
an unrelated business of telecom at a time when real estate business needed funds
4. Lack of review by Auditors
5. Hold of power in corrupt hands I.e. Sanjay and Ajay Chandra (Money laundering )
6. Stability of company financials and outstanding litigation
7. Non-core diversifications, accounting policy and history of promoter-related
transactions
8. Acquisition of land, the way they reported revenues on their books, as well as the large
number of unlisted subsidiaries and related companies, mostly controlled by the
promoters, with which the listed entities had dealings. Land bank disclosure in annual
reports is inadequate and there is no information on areas sold, or unsold areas, or status
of completion
This image depicts the fluctuation in share prices affected by the macro environment and
due to the triggers within the organization
Source:https://www.businesstoday.in/magazine/features/challenges-for-unitech-
builders/story/13887.html
Suggested measures to handle the corporate governance issues revolving in real estate
sector