Promoter's firm to get bulk of Lavasa IPO proceeds

HCC's Swiss construction arm Steiner to get Rs 350 crore; terms of deal inked in March not at arm's length, firm warns in prospectus

Hindustan Construction Company (HCC)'s real estate arm Lavasa Corporation, which is bound for a Rs 750 crore initial public offering (IPO), recently inked a deal which will funnel nearly half of its IPO proceeds to Steiner - a firm owned and controlled by HCC and its chairman Ajit Gulabchand. This is one of the key additions to the company since it last filed for IPO in 2010.

Lavasa, which filed a draft offer document with the Securities and Exchange Board of India (Sebi) last week, inked a master construction agreement (MCA) with Steiner India on March 25. According to the terms of the agreement laid out in the offer document, "Steiner India Limited shall carry out all construction work at Lavasa with retrospective effect from October 1, 2013 on a cost plus fees basis. The fees to be paid to Steiner India Limited for any such construction work shall be 10 per cent of the contract value."

TOO CLOSE FOR LUXURY

• Lavasa inked construction deal with Steiner India in March this year
• Filed for IPO on July 2
• 47% of IPO proceeds or Rs 350 crore to be paid to Steiner India
• Steiner India is an indirect subsidiary of Lavasa’s parent HCC; Ajit Gulabchand is a director
• Third-party quotations not taken while fixing prices of land transacted

The offer document of Lavasa, which is building an eponymous hill city on the banks of the Dasve lake near Pune in Maharashtra, said: "An amount of Rs 3,500 million (Rs 350 crore) from the issue proceeds are estimated to be paid to Steiner India towards the development of certain infrastructure facilities at Mugaon and construction of certain buildings at Dasve and Mugaon."

In response to an email questionnaire sent by Business Standard to Lavasa, an executive of its public relations firm said that the company cannot comment since its filings are under Sebi consideration.

According to sources, Steiner is a world-class construction company with some top building projects around the globe to its credit. "The agreement is a win-win as it will bring best-of-the-breed building quality at competitive prices. Similar companies would charge cost plus 12 per cent on such projects. This will also allow the company to focus on core areas such as planning and management of the city," said a source.

Steiner India is a subsidiary of Swiss-based Steiner AG, which itself is wholly-owned by HCC. Steiner India is a group company and forms part of the Promoter Group. Ajit Gulabchand, chief of the HCC group, is also the chairman of Steiner AG and is a director of Steiner India. Steiner India has made losses of between Rs 4 crore and Rs 14 crore in the past three financial years. In 2010, HCC had acquired the Swiss based engineering and construction firm for Rs 150 crore.

Lavasa said the fund requirements for the projects to be executed by Steiner have not been independently evaluated by financial institutions. "The fund requirements for these objects are based on internal management estimates and have been verified by an independent engineer. However, these fund requirements have not been appraised by any bank or financial institution." It further warned that "the funding requirements are based on management estimates, the deployment schedule may change."

There is more. Steiner had rights over all new projects and very flexible pricing terms. "In relation to any new projects, our company would award all new work to Steiner India, which would construct and complete them on a cost plus fee basis. Further, in relation to new projects, the fee would amount to 25 per cent of the contract value for the development stage of the project. For the execution and completion of the new projects, the parties may agree to a cost plus fee (amounting to 10 per cent of the contract value) basis or a maximal price guarantee basis or a fixed price basis," said the MCA.

Other clauses protected Steiner India from any potential losses. Lavasa has also undertaken to ensure that Steiner does not incur any loss from the project for 18 months, regardless of the revenue actually generated under the MCA. Further disclaimers under the head "risk factors" indicate costs factored into the project outlay did not take into account prevailing market rates. "The costs are based on management estimates and our company has neither executed any contracts / purchase orders nor obtained any third-party quotations for the same. The costs and expenses are subject to a number of variables, including possible cost overruns and changes in management's views of the desirability of current plans, among others." Under the head "related party transactions", where it cited the Steiner example, Lavasa talked about land transactions, where prices might not have been at arm's length. "These transactions also have included acquiring the land or proposing to acquire the land. However, there can be no assurance that we could not have obtained better and more favourable terms had our company not entered into such related party transactions," the firm said in the offer document.