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| March 18, 2016 |
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Impact 
If you have tried approaching a real estate developer enquiring about their new project, your silliest question is given a patient ear and responded to in the most appropriate manner. Before you put the token money down, you are treated like a king. This continues only till you have confirmed your booking. Here is where your journey from king to pauper begins. With every payment instalment made thereafter, their attention continues to lessen. A point in time will arrive, where a casual enquiry about the completion of the project could either be ignored completely or resolved in an unsatisfying manner. You will have no option but to wait, twiddling your thumbs.
Meanwhile, the builder may utilise the funds/capital obtained from you and other customers anywhere he wants; make agreements that unilaterally favour him, change the original plan without hassles, etc. Even if you figure this out and ask for your money to be returned; you will get only promises. In case you are lucky enough to get a cheque, it will be drawn with an intention of dishonouring it, so it will bounce. If you feel irritated, a builder would overtly tell you to either to co-operate with him or would suggest that you knock the doors of the consumer or the civil courts. He knows; an individual buyer neither has the time nor the perseverance to fight against him in a long legal battle. He can spend some those funds for under the table dealings to get an Occupancy Certificate (OC) even when he has not adhered to the developmental plan. (Municipal authorities or the other development authorities issue OCs stating that the construction has taken place as per the plan submitted to the authorities, and authorities thus don't have any objection to the building being occupied).
This has been the state of affairs in the sector that contributes to nearly 9% of India's GDP. The Housing and construction sector has been a major source of revenue for many states. After Agriculture, it's the Real Estate sector that employs a maximum number of people in India. However, it's fragmented nature and lack of transparency in dealings has earned it an unfavourable reputation over the years. The builder-politico nexus and unscrupulous, corrupt practices have made homebuyers vulnerable and builders unrestrained. In absence of the regulator, builders always have an upper hand over customers, for whom justice is difficult to obtain. This is going to change soon.
As you may be aware at the Rajya Sabha recently, the Government successfully passed the Real Estate (Regulation and Development) Bill, 2016. This has cleared the way for the state level regulatory authorities which will be founded as per the guidelines of the recently passed bill.
The passage of the Bill is expected to bring in much-needed transparency to the sector. Now the builder would think twice before short-changing you. The implications of doing so would be as severe as 3 years of imprisonment.
Other Provisions Include:
- The developers will have to maintain a minimum of 70% of the money collected from the potential the buyers in an escrow account opened with a bank, to be utilised exclusively to meet the cost of that project.
- Every project with the proposal of developing 8 flats or acquiring 500 square meters of the plot will have to be registered with the regulator.
- The builder would be held responsible for structural defects in first 5 years.
- The developer will have to take permission from a minimum of 2/3rd of allottees for making changes to the original plan.
- Availing insurance for the land titles would become possible.
- Appellate Tribunals and Regulatory Authorities will have to dispose of complaints within a stipulated time period.
The reaction of developers...
Although developers are welcoming the passing of the Real Estate Bill, they have been unsuccessful in hiding their discomfort. With the Government insisting that the ongoing projects should also be brought under the purview of the new regulation, builders have been expressing their apprehensions. Commenting on this development, The Confederation of Real Estate Developers’ Associations of India (CREDAI), the apex body for India’s private sector developers has expressed that, “This is not only time consuming but also poses insurmountable difficulties in determining the nature and scope of regulation for an ongoing project.”
However, builders have correctly pointed out at some of the shortcomings in the new law. Comments of the Rajeev Talwar, CEO, DLF Ltd highlighted the two elements missing from it, “The Bill does not talk about single-window clearance for approvals. It also needs to hold local bodies/authorities, banks, contractors, financial institutions accountable.”
Genuine builders to suffer the most
Recently a Mumbai-based builder ended his life because the “Golden Gang”—a “team” of politicians and bureaucrats made his life hell demanding money to clear projects. Lawmakers may have found it easy to hold builders responsible rather than taking the long road to improving the bureaucratic procedures and fix up responsibilities. Perhaps for lawmakers, these are petty issues and one-off cases.
In truth, the existing process for project clearance is the root cause of corruption. And it is hard to believe that the lawmakers pretend to be completely oblivious about cases such as local politicians harassing builders.
Since the Bill fails to address two major concerns, prudent customers may continue to be cautious in their dealings with the real estate fraternity, while others may go back to twiddling their thumbs during delays caused for any reason. However if this Bill works, customers can hope to become the King of their castle someday soon.
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Impact
During the pre-budget sessions, Domestic Institutional Investors (DIIs) were bullish on the Indian markets. However since March, they have become net sellers and this has been very puzzling, considering the Budget 2016-17 delivered on many counts. What may baffle you more is that Foreign Institutional Investors (FIIs) have showed confidence in Indian markets post-budget.
Net Investments in Indian Equity Markets
Data as on March 16, 2016
(Source: ACE MF, PersonalFN Research)
As seen in the chart, DIIs have pulled out a little in excess of Rs 7,400 crore. During the same time period, FIIs pumped in more than Rs 9,500 crore.
Prominent reasons why DIIs are selling post budget...
- Redemption pressures
- Emergence of risk averseness among domestic investors
- Profit booking
In contrast, FIIs willed to take more risks, as the worries about cooling economic growth in China and its currency devaluation got factored into stock prices. The commitment of Indian Government to fiscal discipline averted possible downgrades by independent rating agencies.
The role of the Federal Reserve is important
The Federal Reserve (Fed) has adopted a “go slow” strategy on interest rates, citing reasons such as global slowdown and declining energy prices. In its mid-March policy, the Federal Reserve rendered cautious guidance. This is what the Fed feels, “with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”
What to expect
As long as Fed increases interest rates in a predictable manner, monetary policy normalization in the U.S. may not impact global markets to a large extent. In fact, with clear guidance from the Fed and its adherence to it will instil confidence in global investors. The pace of policy normalization affects the value of US$--which sequentially affects the investment flows in emerging markets including those in India.
As for the question of DIIs, they might remain cautious as long as markets stay volatile.
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Impact
Riding a bicycle is not only good for health but contributes to reducing pollution as well. But if you expect to cover 2,000 miles on a bicycle in a short span of time; you might be asking too much of your body. Similarly, lower interest rates contribute to higher economic growth, but if your key objective to revive tanking growth is by slashing borrowing rates, it would be an unrealistic expectation.
Economic growth is a function caused by a number of factors that include lower inflation, higher employment, lower interest rates, easy credit facilities, and ease of doing business among others. At present, too much of attention is being given to the monetary policy from the view point of turbocharging economic growth. The industry has been demanding policy rate cuts, suggesting this will contribute to higher profits. Lackluster corporate performance has been a cause of a concern for the Government. As reported by the Business Standard, the average growth in revenues of 4,033 companies fell by 1.62%, while the net profit dropped by 10.5% in the quarter of December 31, 2015.
In the pre-budget time, the demand for rate cuts had waned as there were many speculations on the budget. Many experts were predicting that the Government might miss the fiscal deficit target.
To ready more about this story and Personal FN’s views over it, please click here.
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Impact
The Securities and Exchange Board of India (SEBI) recently banned willful defaulters from accessing capital markets. This will restrict willful defaulters from:
- Issuing fresh debt to public
- Issuing fresh equity
- Assuming positions on company boards
- Establishing capital market intermediaries such as mutual funds, brokerage houses
- Controlling any other listed entity
This move is being considered as a crucial development against the backdrop of a quiet exit from the poster boy of Indian willful defaulters. Bankers have been citing irrational reasons about being unable to recover money from him for so long.
Cut back to the “Good times”...
Kingfisher started commercial operations in 2005. The brand became a suggestive icon to the exuberance of Indian elite. Many politicians, corporate, journalist experienced the “joyous rides” on the “kingmakers” personal invitations. The newly launched airline company achieved important milestone one after the other in no time (except being profitable). The brand grew; sadly, finances eroded.
Milestone turned into millstone
United Breweries acquired 26% stake in Air Deccan, a low cost carrier in a whopping Rs 550 deal in 2008. lust for power and control yielded the end of “good times” as the writing on the wall. Within a matter of one year, the Kingfisher debt soared from close to Rs 1,000 crore to a humongous total of Rs 5,600 crore plus. The number reached the Rs 7,000 crore mark by 2010—a year in which banks restructured loans given to Kingfisher for the first time. Kingfisher halted operations in 2012.
READ THIS CAREFULLY: The devil is in the details
Banks converted Kingfisher’s Rs 1,400 crore worth loans to equity at a huge 60% premium over the prevailing markets price then. Interestingly, the banks as well as the company claimed that the deal was carried out based on the floor price formula of the SEBI, justifying the premium. Bankers went ahead to call it a winning proposition. If that wasn’t enough, they justified their lending against the “brand of Kingfisher”, estimated to be worth Rs 4,100 crore.
And, the worth of the brand now?
Information by official sources of SBI to DNA (story published on February 16, 2016) states, the brand value had decimated to a paltry Rs 6 crore.
What makes the owner of “Royal Challenger” a willful defaulter?
Kingfisher Airlines is alleged to have diverted funds to United Breweries Holdings and other group companies. Mr. Mallya is also said to have siphoned funds. This is probably how he continues to paint the town red, despite drowning in a flood of red lines of debt l.
To ready more about this story and PersonalFN’s views over it, please click here.
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Equity markets have been volatile since the beginning of 2016. Earlier, it’s been observed that falling markets make individual investors jittery. As quoted by Times of India dated March 16, 2016; Equity Linked Savings Schemes (ELSS’) have witnessed inflows of Rs 2,154 core in first two months of the year—a 12% rise over inflows recorded during the similar time period last year. This suggests that many investors have woken up at the last minute and have been investing only with the motive of saving tax. Sliding markets have provided them with lucrative buying opportunities, but that’s just a matter of luck. Had markets climbed up, they would have still invested as their main objective was to save tax.
However, there’s one special reason this time why investors have been increasingly trusting ELSS funds. Shrewd fund houses have been announcing dividends generously to attract more customers. The entire 2015 was a quiet year for markets, actually ending in the red. Despite that, fund houses have been distributing huge dividends out of accumulated profits. This has been giving investors a feeling that their funds have done remarkably well even in bad markets, and hence the handing out of hefty dividends.
Although, there’s absolutely nothing to blow the whistle on, as mutual funds are not violating any regulatory norm, this somehow comes across as a marketing gimmick. Investors should focus more on total returns rather than just concentrating on the amount of dividend they received.
PersonalFN believes, dividend shouldn’t be a criterion to make any investment in mutual funds. You should invest in mutual fund schemes that have performed consistently across timeframes and under all market conditions.
Your investment in ELSS not only saves you tax, but also helps you generate wealth in the long run. Therefore, your choice matters. |
Economic Stimulus: Attempts by governments or government agencies to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kick start a lagging or struggling economy. Governments can use tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few, to accomplish this.
(Source: Investopedia)
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Quote : "All intelligent investing is value investing — acquiring more that you are paying for. You must value the business in order to value the stock."
- Charlie Munger
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