With Satyam scam making investors more concerned about corporate governance issues, a global investment banking major has said that the country's top real estate firms, including DLF and Unitech, are found lacking in terms of transparency and key disclosures in their businesses.
Noting that related-party transactions account for a significant portion of their revenues, Credit Suisse said in a report that their network of key related parties run into hundreds of entities and include a number of un-listed JVs, subsidiaries, partnership firms and companies under control of key management personnel.
"It is clear after the Satyam incident that investors should focus on corporate governance issues, particularly because of losses incurred in the past 12 months that have failed to rise to the fore," Credit Suisse said in its report on Corporate India.
Some "concerns" might not be wrong from a legal viewpoint, but "flags for investors what they should know."
On DLF Ltd, the report said the company has had significant intangible asset/goodwill on its balance sheet, there are significant departures from conservative accounting practises, there have been material related-party transactions and the company does not disclose detailed accounts of key subsidiaries on a regular basis.
Besides, there is "no transparency in the land acquisition process. Promoters have privately controlled entities from which DLF buys land. Also, its landbank disclosure in annual reports is inadequate."
Credit Suisse further noted that "DLF's dealings with the promoter entity have been questioned by investors. In FY'08, DLF sold assets/real estate projects amounting to Rs 5,560 crore to a promoter-controlled entity, DLF Assets. It also cancelled an earlier sale of assets worth Rs 1,890 crore."
Previously, DLF has settled with minority shareholders who complained that they were denied participation in the company's rights issue in September 2005.
The report further noted that while DLF does not actively deal with derivatives, it "does use forward contracts and swaps to hedge its risks associated with fluctuations in foreign currency and interest rates."
Unitech also does not actively deal with derivatives and other financial market instruments, the report said on the country's second largest real estate firm.
However, both DLF and Unitech have departed from conservative accounting practices, it said. The two companies recognise revenues on a percentage of completion method even where the cash receipt is yet to become due and they also capitalise on interest expense during construction of project.
Incidentally, auditors of both firms have not made any observation in their last annual or limited review reports.
On related-party transactions at Unitech, the report said that loans taken from key management personnel and controlled entities amounted to Rs 350 crore in FY'08. The key related parties at Unitech include a listed entity Unitech Corporate Parks and un-listed parties are Unitech Wireless, 316 subsidiaries, 21 JVs and associates and four entities under the control of key management personnel.
Unitech also does not disclose detailed accounts of all subsidiaries and has invested in an unrelated business of telecom at a time when real estate business needed funds.
On DLF Ltd, the report said the company has had significant intangible asset/goodwill on its balance sheet, there are significant departures from conservative accounting practises, there have been material related-party transactions and the company does not disclose detailed accounts of key subsidiaries on a regular basis.
Besides, there is "no transparency in the land acquisition process. Promoters have privately controlled entities from which DLF buys land. Also, its landbank disclosure in annual reports is inadequate."
DLF, where key related parties included 245 subsidiaries, 12 partnership firms, 12 JVs and 124 entities under control of key management personnel, had outstanding receivable from promoter entities of Rs 1,940 crore as of March 2008.
DLF, where key related parties included 245 subsidiaries, 12 partnership firms, 12 JVs and 124 entities under control of key management personnel, had outstanding receivable from promoter entities of Rs 1,940 crore as of March 2008.
