Emaar 'offers' a can of worms!
Emaar MGF offer document opens up can of worms
• Mega risks camouflaged in mega offer• 83% of land reserves is farm land• Not a single completed project!• In Wakf property controversy• Minority shareholders' rights thrown to the winds• Tax raids haunt the Company
The Draft Red herring Prospectus filed by real estate developer Emaar MGF Land Limited has opened a can of worms with the lack of clear title to land reserves and possible legal disputes emerging as major risk factors.
A cursory glance at the risk factors listed in the offer document, now in public domain on the SEBI website, shows that a whopping 83% of the company's land reserves of 12,544 acres is still agricultural land. "We cannot assure you that our joint development partners will obtain such approvals and/or renewals, in a timely manner, or at all," the DRHP says.
The company's offer document says (refer to pg xvii of Risk Factors): "Of our total Land Reserves of12,544 acres, approximately 83 per cent comprises agricultural land for which we and our joint development partners have not yet obtained a certificate of change of land use. We are currently in the process of converting another 10 per cent of our total Land Reserves into non-agricultural land for which applications are pending with relevant authorities.
"Moreover, there can be no assurance that we or our joint development partners will not encounter material difficulties in fulfilling any conditions precedent to the approvals or renewals. For example, our licenses in respect of certain group housing projects in Punjab require us to construct residential units/develop plots for economically weaker sections on specified area of land. The sale, including the sale price, of such units/plots is to be determined by the government."
The document says: "Our plans in relation to a significant number of our intended projects in our four business lines (residential, commercial, retail and hospitality) and other initiatives (healthcare, education and infrastructure) have yet to be finalised and approved. We require statutory and regulatory approvals and permits and applications need to be made at appropriate stages for us to successfully execute each of these projects. For example, we are required to obtain requisite environmental consents, fire safety clearances, no-objection from the Airport Authority of India and the commencement, completion and occupation certificates from the competent governmental authorities.
The failure to acquire or obtain development rights over targeted or purchased land may cause us to modify, delay or abandon entire projects, which in turn could cause our business to be adversely affected. Further information on our Land Reserves is contained in "Our Business – Description of our Business – Land Reserves" on page 66 of this Draft Red Herring Prospectus.
Emaar MGF admits that the company faces"uncertainty" of title to its lands. The difficulty of obtaining title guarantees in India means that title records provide only for presumptive rather than guaranteed title. The title to these lands is often fragmented. Some of these lands may have irregularities of title, such as non-execution or non-registration of conveyance deeds and inadequate stamping and may be subject to encumbrances of which we may not be aware.
For most of our land we have not yet completed the mutation process, which is the process by which our name is reflected in the local authority revenue records as owner of the land, and/or obtained non-encumbrance certificates from relevant authorities. In addition, our projects may be executed in collaboration with third parties. In some of these projects, the land may be owned by one or more of such third parties. In such instances, we cannot assure you that the persons with whom we enter into collaboration agreements have clear title to such lands.
Please look at these points emerging from DRHP:
First Risk factor in the DRHP1. Emaar MGF is a recently formed company with a limited operating history and therefore investors will only have limited past results on which to base their assessment of us.We were incorporated on February 18, 2005 and have financial statements for only two completed fiscal years and for the three months ended June 30, 2007 which are included in the Draft Red Herring Prospectus. As a result of our short operating history, we do not have any completed projects and prospective investors will have limited information with which to evaluate the quality of our projects and our current or future prospects and on which to base their investment decision. Companies in their initial stages of development present substantial business and financial risks and may present much higher investment risk.
We have incurred operating losses in our first two fiscal years of operation. We anticipate that we will have limited revenue in the immediate future and as a result our operating losses may continue in the short term. There can be no assurance that we will achieve and sustain profitability in the near future.
Minority Shareholders rights being compromised in Emaar MGF IPO. Emaar can remove Chairman and CFO and MGF can remove MD and CEO.
4. We benefit from our relationship with Emaar and MGF and our business and growth prospects may decline if we cannot benefit from this relationship in the future.We benefit from our relationship with Emaar and MGF in many ways. We have access to Emaar's brand name, development expertise and international experience.
Our future success is influenced, in part, by our continued relationship with Emaar and MGF. We cannot assure you that we will be able to continue to avail of benefits from this relationship in the future. If we lose the current benefits of our relationship, our business and growth prospects may decline and our financial condition and results of operations may be adversely affected.
5. We will continue to be controlled by our Promoters and certain Promoter Group entities after the completion of the Issue. One of our investor will continue to have certain rights after the completion of the Issue.After the completion of the Issue, our Promoters along with certain Promoter Group entities will control, directly or indirectly, approximately 85.7 per cent of our outstanding Equity Shares. Our Articles of Association and Joint Venture Agreement dated December 18, 2004, as amended, among Emaar, MGF and Sareen Estates Private Limited (the "Emaar MGF Joint Venture Agreement") confer certain rights on our Promoters, Emaar and MGF, relating to the governance of the Company.
Each of Emaar Mauritius and MGF has the right to appoint three Directors on the Board, MGF has the right to appoint and remove the Managing Director and the Chief Executive Officer of the Company and Emaar Mauritius has the right to appoint and remove the Chairman of the Board (who has a tie casting vote) and the Chief Financial Officer of the Company.
In addition, our Articles of Association provide that any decision of the Board in favour of a resolution requires the affirmative vote of at least one nominee Director of each of Emaar Mauritius and MGF.
As a result, our Promoters will continue to exercise significant control over us, including being able to control the composition of our Board and determine matters requiring shareholder approval or approval of our Board. Our Promoters may take or block actions with respect to our business, which may conflict with our interests or the interests of our minority shareholders.
By exercising their control, our Promoters could delay, defer or cause a change of our control or a change in our capital structure, delay, defer or cause a merger, consolidation, takeover or other business combination involving us, discourage or encourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
For further information, see the sections "History and Certain Corporate Matters" and "Main Provisions of the Articles of Association" beginning on pages 96 and 697, respectively, of this Draft Red Herring Prospectus.
6. There may be possible conflicts of interest between us and our Promoters or the entities forming part of our Promoter Group or with entities in which our Directors are interested.
As per the Emaar MGF Joint Venture Agreement and our Articles of Association, Emaar and MGF have agreed that all FDI compliant real estate development projects in India will be undertaken solely by Emaar MGF. The Emaar MGF Joint Venture Agreement and our Articles of Association further specify that each of Emaar and MGF will direct to us any opportunity received by them relating to the real estate business and will not permit or authorise any of their respective subsidiaries, affiliates or other associated companies to compete with us in connection with the real estate business. However, MGF Group is free to undertake any non-FDI compliant projects independently.
Emaar MGF's Hyderabad " Boulder Hills" project involved in Wakf Controversy
In addition, there is also litigation pending in relation to some of our land forming part of our current and planned projects. For example, in respect of our Boulder Hills project, the Andhra Pradesh High Court, by an interim order dated September 20, 2007, has directed Emaar Properties, our Promoter, not to undertake any construction on 400 acres of land in the Manikonda village in the Andhra Pradesh, pending the disposal of the writ petition relating to this land which the petitioner claims has been notified as "wakf land" under the Andhra Pradesh Wakf Act, 1955, and is reserved for specified religious purposes.
This land comprises a substantial portion of our Boulder Hills project, which we propose to develop over an area of approximately 510 acres. An appeal has been filed by Emaar together with an affidavit from Emaar Hills Township Private Limited and Boulder Hills Leisure Private Limited. If Emaar is unsuccessful in its appeal, we may be not be able to undertake the development of the Boulder Hills project, which may result in a material adverse effect to our financial condition and results of operations.
We are not a direct party to these proceedings and may not have adequate standing before the courts adjudicating such litigation to defend our interests with respect to the lands at issue. We cannot provide any assurances regarding the outcome of such litigation. Any adverse outcome may affect our ability to develop the properties which are the subject matter of such litigation, and therefore, adversely affect our business, financial condition and results of operations.
The Company has additionally 2 criminal cases including a cheque bouncing case under Section 138, 62 civil proceedings, including appeals, filed against it in respect of land, including for restraining sale of land, for partition of land and specific performance and 7 Tax Proceedings including assessment proceedings and summons
While the Promoters and the Promoter Group has 29 civil proceedings, including writ petitions filed against them challenging certain notifications issued by the Govt. for acquisition of and 19 Tax Proceedings including assessment proceedings and summons
For further details of these legal proceedings, see the section "Outstanding Litigation and Material Developments" beginning on page 589 of the Draft Red Herring Prospectus
Investors in the Emaar MGF IPO to face the consequences of liabilities arising out of Income Tax Raids
45. We may be subject to tax liabilities arising from search and seizure operations by the Indian income tax authorities.
On September 12, 2007, we were subjected to search and seizure operations under section 132 and survey under section 133A of the Income Tax Act, 1961. During the course of these search and seizure operations, the income tax authorities have taken custody of certain material such as documents, records, computer files and hardware, and recorded statements of certain of our officials.
Simultaneously, there were similar operations conducted at the residences of certain directors, Promoters and Promoter Group Companies. The tax officials are examining the materials seized and statements recorded during the course of the operations. We have not received any communication or demand notice so far from the income tax authorities in connection with the said search and seizure operations. Pending completion of these proceedings, tax liability if any that may arise on this account, is presently unascertainable and will be recognized upon conclusion of search proceedings
According to sources the Company has offered over Rs.250 crores as undisclosed Income.
Zerodha (Trading & Demat Account)
RHP
