Indian Property IPOs May Stall After Bribery Probe Triggers Stock Decline

India’s busiest quarter for real estate share sales in three years may falter after a corruption probe into loans to developers triggered a slide in stocks, the nation’s top arranger for initial offerings said.

“In the short-term, the real estate industry will face some headwinds,” said V. Jayasankar, head of equity capital markets at Kotak Mahindra Capital Co. in Mumbai. “When the sentiment improves and volatility subsides, the market will favor companies with strong corporate governance practices.”

India’s Realty Index has tumbled 14 percent, the third- biggest decline among 2,000 global indexes, in the two weeks since executives from LIC Housing Finance Ltd., a brokerage and three banks were arrested. Twelve developers led by Embassy Property Developments Ltd., Raheja Universal Ltd. and BPTP Ltd. have announced plans to raise $3 billion from IPOs as early as this year, according to data compiled by Bloomberg.

Property companies also face rising borrowing costs and shrinking access to credit after the bribery investigation, according to Bank of America Corp.’s Merrill Lynch unit and Ambit Capital Pvt. Lenders may cut back on funds to the real estate industry for the next three to six months, Merrill Lynch said in a note to clients on Dec. 1.

“Not even one property IPO will happen over the next few months, probably until March,” said Samir Arora, founder of hedge fund Helios Capital Management Pte. in Singapore. “No lender will want to lend to developers as it may be viewed as bailing out the companies. Even the mutual fund, qualified institutional placement route will be shut,” he said, referring to additional share sales to institutional investors.

Top Ranking

Indian real estate companies led by Morgan Stanley-backed Oberoi Realty Ltd. and Prestige Estates Projects Ltd. raised 22.3 billion rupees ($493 million) so far in the fourth quarter, the most since the 37 billion rupees raised in the third quarter of 2007, according to data compiled by Bloomberg.

Kotak retained its top ranking arranging all IPOs in a record year for first-time sales, after helping Indian companies including Oberoi Reality sell 64.5 billion rupees of stock, the data show. Enam Securities Pvt. was ranked second ahead of Morgan Stanley, both unchanged from 2009’s league-table status.

Real estate companies are facing other obstacles. Hindustan Construction Co.’s Lavasa Corp., which is planning a 20 billion rupee share sale, was ordered to halt work at a hill-top resort two hours drive from Mumbai and prove it hadn’t breached planning rules, according to a notification from the environment ministry on Nov. 26.

The company challenged the ministry’s order in the Bombay High Court, and said it “appears to stall the IPO of Lavasa.”

Raising Funds

India’s capital markets regulator barred the founders of Sahara Prime City Ltd. and affiliates Sahara India Real Estate Corp. and Sahara Housing Investment Corp. from raising funds from the public, according to an order posted on the regulator’s website on Nov. 24. The group said in a statement the decision was “very unreasonable and arbitrary” and challenged the decision in the Allahabad High Court.

The Central Bureau of Investigation said on Nov. 24 it had arrested eight executives including the chief executive officer of LIC Housing for allegedly operating a scheme to bribe senior officials at state-run banks to approve loans and provide confidential information. The eight were granted bail on Dec. 3.

The investigations have dragged down the broader stock market, triggering the biggest fall in the Sensitive Index in more than six months yesterday. One97 Communications Ltd., a mobile-phone technology company partly funded by the venture- capital arm of Intel Corp., postponed next week’s IPO until January, Chief Financial Officer Vikas Thapar said yesterday.

The 13-stock realty index declined 30 percent this year compared with a 10 percent advance in the Sensex. The measure is trading at 1.2 times book value, down from 1.8 times two months ago, according to data compiled by Bloomberg.

“At these valuations I can’t see any IPOs happening unless someone is very desperate,” said Mumbai-based analyst Parikshit Kandpal at Ambit Capital. “There is a huge gap between the valuations developers were seeking and the valuations in the listed space now.”

To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net;

To contact the editor responsible for this story: Andreea Papuc at Apapuc1@bloomberg.net

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