Why did the law take forever to catch up with Emaar MGF?

Company's farm land holdings public since 2007; ED took two years to raid and four more years to send notice

The Rs 8,600-crore notice from the enforcement directorate (ED) on Emaar MGF for alleged violations of the foreign direct investment (FDI) norms came nearly six years after the company first disclosed in a public document that it had acquired large parcels of agricultural land.

The notice came over three years after the ED first raided the premises of the company and some its key personnel, including vice-chairman Shravan Gupta. It is not clear what led to this delay in deciding on a case of alleged end-use violation of FDI guidelines.

Business Standard pieced together the events from the two prospectuses filed by the Delhi-based realty major. While the company itself had two different accounts of its land reserves and the farm lands portion in these reserves, the ED seems to have gone by a different number.

Under current regulations, FDI is banned in agriculture and agriculture-related activities. However, 100 per cent FDI is allowed for integrated townships and housing development projects. Therefore, while Emaar MGF, the joint venture between Dubai-based Emaar Properties and Indian developer MGF Development, could build houses and develop townships, it could not have bought agricultural land, as pointed out in the ED statement issued on Tuesday, following the showcause notice. According to the ED, it could only buy those land parcels open for commercial/residential development.  

But in a little over two years of setting shop in India, in February 2005, the collaboration had built up a formidable land bank. It soon wanted to go public.

On record
In a draft prospectus filed with the Securities and Exchange Board of India (Sebi) on September 26, 2007, Emaar said it already had a land bank of 12,544 acres spread across the country. The bulk was in north India, in and around Delhi, Mohali and Dehradun.

A significant part was agricultural land. In the prospectus, the company said, “Of our total land reserves of 12,544 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.”

By this disclosure, roughly 10,600 acres of the company’s pan-India empire was paddy and wheat fields.  

The company did not respond to a detailed questionnaire from Business Standard related to the agricultural land acquired by Emaar MGF in recent years. While the company has launched around 30 projects (both residential and commercial) so far in the country, it has delivered only five, including the Commonwealth Games project in the capital, sources said.

Emaar's explanation to the ED charges appears in the 2010 prospectus. It said, “The company is engaged in the business of real estate development and is not involved in any activity in the agricultural sector…Further, at the time of the company’s proposed Initial Public Offering (IPO) in fiscal 2008, a clarification had been obtained from the DIPP in respect of the acquisition of agricultural land by an Indian company that has received FDI. The DIPP, through its letter dated November 21, 2007, had clarified that a company incorporated in India that has received FDI has as much freedom as any other resident Indian entity to carry out any business which is permitted under the foreign exchange regulations.”

The Foreign Exchange Management Act (Fema) regulations permit a Non-Resident Indian or a Person of Indian Origin to acquire immovable property in India, other than agricultural land or plantation property or farm house. Further, foreign companies permitted to open a branch or project office in India are also allowed to acquire any immovable property in India which is necessary for or incidental to carrying on such activity.

The IPO, expected to be sold at Rs 725-850 a share, failed as the market crashed. Not even the might of seven marquee investment banks could save it. Emaar MGF never really recovered from this.

The market regulator cleared the offer document in January 2008. And, the second prospectus filed by the company in 2010, cleared by Sebi, has a disclosure about the proceedings initiated by the ED for violation of Fema and the Income Tax (I-T) Act.

Raids
On December 3, 2009, the company, two of its directors, some of its employees and an independent real estate broker acting for it “were subjected to search and seizure operations conducted by the ED under Section 37 of Fema, 1999, as amended, read with Section 132 of the I-T Act, 1961, as amended,” the company would later say.  These search and seizure operations were conducted at the offices of the company in Delhi and Gurgaon. Searches also took place at the residences of two of its directors, certain of its employees and the independent real estate broker of the company, it said.  

In a statement issued after the December 2009 search, the investigative agency said Emaar MGF had availed of more than Rs 6,000 crore of FDI in the past four years, and the seized documents indicated “large-scale violations of FDI guidelines”.

“The company has about 12,800 acres of land bank, out of which 8,700 acres of land is agricultural land. Most of this farmland has been acquired out of FDI, which is a violation,” the ED statement said. The ED claimed the managing director of the group “admitted that the FDI funds were used for purchasing agricultural land”.

The ED notice issued earlier this week conforms roughly to this number, valuing the land roughly at around Rs 1 crore an acre. Emaar’s cost of acquisition for the entire land reserve was put at Rs 79 lakh an acre in the prospectus filed in September 2010. The latest ED statement said when asked about the foreign fund utilisation, Emaar MGF replied it was for construction development. The directorate found the money was used for buying agricultural land, which was not allowed.

In the second prospectus, Emaar showed a lower land bank of 11,365 acres. The agricultural land also fell sharply. “Of our total land reserves of approximately 11,365 acres, approximately 62.7 per cent comprises agricultural land for which we or our sole/joint development partners have not yet applied for or obtained a certificate of change of land use.”  The size of agricultural land holding comes to around 7,125 acres.

Now
Government sources said, typically, a penalty in a Fema violation case is a percentage of the amount involved. But in many instances, the penalty could be as much as the amount for which the notice is sent, or even higher. The company, which tried to launch an IPO thrice but failed, has an estimated annual revenue of Rs 2,000 crore. Its net debt is a little over Rs 3,500 crore.

Emaar MGF has also been under the probe of other central agencies such as the Central Bureau of Investigation on several other issues, too. Its Commonwealth Games residential project at Akshardham in the capital ran into problems over faulty construction and delivery delays, for instance.