After years of negotiations, Hirco Plc early this month wrote off assets worth Rs 3,000 crore in Mumbai and Chennai after the projects defaulted on their loans. These weren't small projects. The Hirco Palace Garden in Chennai, launched in April 2007, promised 1,700 apartments, a five-star hotel and a nine-hole golf course, among other things. Over 1,300 people had invested in the township which was to be built in phases with possession starting from June 2010. The other project, a 560-acre housing complex in Panvel near Mumbai, was an equally grand proposition. Meant to house 5,000 people, the first phase of the project was to be completed by December 2017. However, work on both the projects has now come to a grinding halt.
The defaults have spelt bad news for the real estate sector which is struggling to regain investor confidence. The incident has created panic among investors; many people who were planning to invest in the two complexes have changed their plans, while those who had already invested have stopped their monthly installments. This has put a question mark on the future of the two projects. Experts say Hirco's troubles could affect the plans of other real estate developers looking to raise funds abroad, especially on the London Stock Exchange's Alternate Investment Market, or AIM, where Hirco was listed.
"Nobody will have faith in Indian developers. I do not think anybody can go to AIM to raise money now," says a top executive of a large real estate consultancy who does not want to be named. London's AIM has been a favourite with Indian real estate companies because of the ease with which they can list there and raise money. There are over two dozen Indian companies listed on AIM, half of which are real estate developers. Experts say after Hirco's troubles and the suspension of trading in its shares at AIM, investors may not be too happy to put their money into real estate projects in India. And that may worsen the slowdown in the sector. "If developers are not able to raise funds at 2 to 3 per cent, then they may have to borrow at 13 to 14 per cent, which is not a good deal for them," says the person quoted above.
Even though defaults among big developers are rare, real estate consultants say companies are routinely accused of diverting funds meant for one project to another. While there is no clarity on what caused the two Hirco projects to default, industry sources say both the townships were badly managed. The Hiranandani group, which was developing the two projects, has held the slowdown responsible for all the trouble. What have complicated matters are the allegations of fraud made by Hirco, the project's owner, against the Hiranandani group which sourced projects for it.
Hirco is actually the AIM-listed investment vehicle of the Hiranandani group. It had invested over £350 million in the two townships. In February last year, Hirco sued the Hiranandani group promoter, Niranjan Hiranandani, and his daughter, Priya Hiranandani-Vandrevala, for fraud in the Isle of Man. Hirco alleged that the Hiranandanis persuaded it to invest £350 million by withholding key facts about the cost and the time required to complete the project, which caused Hirco to "grossly overpay for the townships".
Apart from the investment by Hirco, loans were taken from HDFC (Rs 500 crore) and Tata Capital Financial Services (Rs 76 crore) for the two projects. And then the projects defaulted. Hirco's contention is that the projects generated enough cash to repay the loans. According to it, the two projects together made approximately £192 million (around Rs 1,920 crore) till November 2013 in cash flows. Furthermore, according to estimates by property consultant Cushman and Wakefield, the Chennai and Panvel assets were worth £556 million (Rs 5,560 crore) which was enough to secure debt of up to £101 million (Rs 1,010 crore). In other words, these assets could have been leveraged to avoid the defaults. Hirco has now sought damages of £303 million in compensation for losses due to the delay.
The Hiranandani group has strongly refuted these allegations. A representative said the group had no knowledge of the matter as it was not involved in the day-to-day operations of the project for the last three years. As with most realty projects in the country, the Hiranandani group had sub-leased the project to contractors. "Hirco has had a representative observing the proceedings at every project for at least 18 months, so they should have a far greater insight than the Hiranandanis into the state of financing and the use of the proceeds," says he.
Numerous claims and counter-claims have followed from both sides in recent months. According to a spokesperson of the Hiranandani group, Niranjan Hiranandani in a letter to Hirco on 25 February 2014 had made a number of proposals aimed at salvaging the projects. "Those proposals included recapitalising the project companies at a level which satisfied the banks and allowed the project development to continue, or even purchasing the projects. In each case, it was offered that a Hiranandani company would assist in the development of the projects," he says.
Hirco Chairman John Chapman says no such offer to buy out or restructure the projects was ever made during his tenure in the company. In fact, he alleges the defaults were stage-managed by the Hiranandani group as it was keen to take over the properties at low prices. "Niranjan Hiranandani, or entities associated with him, have already bought the Chennai asset and will soon buy the Panvel assets, each for a lot less than their last appraised value," Chapman said in a recent letter to Hirco's shareholders. "Given the lack of transparency in the auction process - we have been told that there is a 'gentlemen's agreement' among developers not to bid on each other's foreclosed assets - it seems unlikely that there will be any surplus over and above the value of the bank debt that would be used to satisfy obligations to Hirco."
HDFC, in order to recover its money, decided to auction the Chennai property. The Hiranandanis are believed to have bought the township for Rs 550 crore. Chapman says the property was valued at Rs 2,060 crore and the unencumbered asset, Chennai Commercial, had not been valued separately from Chennai Residential. Meanwhile, Tata Capital Financial Services, has filed a winding-up petition against the Panvel project. For the buyers though, the wait may be far from over.