Friday, July 13, 2007

IPO, Land Bank and Land Valuation

Mr.Pranay Vakil, Chairman, Knight Frank

Sebi has issued new guidelines that lay out how the land reserves of real estate companies can be valued.

The companies that want to issue shares, must own the land and must have paid for it, and the land must be capable of doing what they project it to do in the prospectus,” said Pranay Vakil, chairman of Knight Frank.
For example, a no-development land cannot be marked in the prospectus as land that can be developed as an IT park.

These stringent norms from the market watchdog have put a full stop to the rampant jugglery issuers were resorting to in terms of valuation. DNA - Money - ‘Down syndrome’ grips real-estate firms - Daily News & Analysis

Mr.M Damodaran, Chairman, Securities and Exchange Board of India (SEBI)

As perthe norms, companies are allowed only to show land that they own, not the land they intend to buy in the future. Moreover, the valuations have to be based on the current market value and not on future projections.
Some real estate companies are inflating land bank values ahead of a public offer of shares by temporarily acquiring land from farmers for a fee and then returning the land to them after the public issue is launched, Damodaran said.

He said the farmers are paid a meager amount for signing the documents. “The first set of documents is what is made available when you build up the land bank and having raised your money, the second set of documents becomes effective. That is, on non-existent landbank you would have parted with money,” Damodaran said.

Financial Accounting Theory, (E. Schumann's 2007 Class), Historical Cost VS Fair Market Value By feelartistic on YouTub

DLF Land Bank Break-up

Land ownership pattern.

11.3 % - with Dlf and subsidiaries .

44.6 % - Development rights .

35.9% - Letter of acceptance .

8.2 % - Dlf along with JV partners

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