Is SEBI protecting the interests of retail individual investors in REAL ESTATE FUNDS?

Will SEBI do something about them?

Last week, when Mr. Ajay Piramal announced his company’s grand entry into financial services, it was seen as unchartered territory for the healthcare major. The stock was battered by the market on Monday. Another announcement that went unnoticed was compnay’s plans to get into fund management for the real estate and infrastructure sectors through the acquisition of promoter group companies Indiareit Fund Advisors Pvt Ltd(IFAL) and Indiareit Investment Management Company (IIMC) for a total consideration of Rs2.25bn. It makes me wonder what happened to his earlier announcement where he said that he is looking for a buyer for Indiareit as he saw a potential conflict of interest.

 However, now Piramal’s are not selling the Indiareit business and now they don’t see any conflict in doing own real estate business and managing individual investor money in Indiareit funds. In fact, taking shareholder money from his Pharma business exit to up his stake to 100% in IndiaREIT i.e. rewarding his key stakeholders.

The question is – what changed in last six months and what happened to the conflict of interest.

Have Piramals smelled an opportunity after Neptune Kurla deal to misuse retail investors money. It has been reported in media that in Jan this year Indiareit exited the Neptune Kurla deal in Bandra Kurla Complex, giving two and a half times the initial corpus however many analysts says that there are other real estate developers who were willing to pay much higher price ( around four times).

The fact that this is private fund management business which is not regulated as closely as public funds, hence are Piramals planning to make use of this loophole to further their casue of building their own realty development business. My question is what will happen to the individual investors like you and me who have invested in India Reit through third party distributors.

What is this conflict of interest? And how it is still there – while Mr. Piramal has got selective amnesia – the conflict remains in form of:
· Making investments: if Piramals are doing own development business and also fund management business it should be a cause of concern for the retail investors in the funds because Piramal as controlling shareholder of the funds can influence investment decisions and can divert attractive deals to own business. World-over investors dislike such conflicts and like to invest with independent fund managers. ·

Selling investments: As a controlling shareholder Piramal can also influence sale of investments by the funds. It is interesting to note that in Jan 2011, an investment by Indiareit fund in Neptune Kurla project was sold to a Piramal group entity. Though the investment was sold above cost,There are rumours in the market that some real estate developers were willing to pay higher multiples. but the question to be asked is how the pricing was determined. Was there a transparent process of inviting bids from other interested buyers in the market? If not, then isn’t it against corporate ethics?

It is interesting to note that around the same time other funds like Kotak have made exits at much higher returns. ·

Each deal has a life cycle which has different stages of risk and can be structured with different classes of capital: how this can be misused is that Piramals can invest fund’s money as risk capital and pump in own money in the same deal at an assured return (as debt) or at later stage when risk is lower hence they can use fund to create deals in risky stage and then invest own money with low risk element and at attractive returns.

Finally the key question to be asked is who is protecting the interest of 5000 retail investors who have invested their savings in Indiareit. Are the controlling shareholders planning mis-use of retail money because the sector is not regulated closely (the fund is registered with SEBI but there are no strict regulation norms / close scrutiny like for public/mutual funds). Hence the larger question is not about legality of the deal but more about intent and good corporate governance; whether Mr. Piramal will decide to give business ethics a miss or will better sense prevail and interest to minority stakeholders will be saved is to be seen.