State Cabinet to appoint three-member committee
The state Cabinet on Thursday decided to appoint a three-member committee to probe the alleged dilution of equity of the Andhra Pradesh Industrial Infrastructure Corporation (APIIC) by its joint venture partner Dubai-based real estate developer Emaar Properties.
Based on the recommendation of the committee, the government will take necessary action, according to minister for information and public relations J Geeta Reddy, who briefed the media about the Cabinet decision.
The controversy pertains to a mega infrastructure development project in Hyderabad envisaged way back in 2002.
The project involves construction of an international convention centre, star hotels, an 18-hole golf course and a township besides an IT/ITeS special economic zone here.
The controversy centres around dilution of APIIC’s equity from 49 per cent as agreed in the original memorandum of understanding (MoU) to 26 per cent and also Emaar roping in its group company Emaar MGF Land Limited as a co-developer for the township component of the project.
“The equity of APIIC has fallen to as low as 6.5 per cent in the case of the township project,” APIIC chairman, S Sivarama Subrahmanyam, told Business Standard adding this would result in a loss of Rs 1,000 crore to the state-owned corporation.
Emaar Properties PJSE and APIIC had entered into a JV agreement for developing the integrated project during the regime of the Telugu Desam Party in 2002. According to the agreement, APIIC would hold 49 per cent equity and the remaining 51 per cent stake would be held by Emaar.
Revised agreement
After the Congress came to power in 2004, the project was restructured and a revised agreement was signed by Emaar and APIIC in April 2005.
Under the revised structure, three special purpose vehicles (SPVs) were created. The first SPV, Emaar Hills Township Private Limited (EHTPL), was entrusted with the task of development of a township at Manikonda where IT majors like Microsoft and Infosys besides the Indian School of Business are located. An extent of 258 acres was allotted to this SPV on sale basis.
The second SPV, Boulder Hills Leisure Private Limited, was set up for development of a golf course, a golf club and a resort hotel at the same place (Manikonda). An extent of 235 acres was allotted to this SPV for the golf course on a lease basis and 17 acres on sale basis for setting up the hotel.
The third SPV , Cyberabad Convention Centre Private Limited, was set up for development of a convention centre and a business hotel at Madhapur on the grounds of the National Academy of Construction. The SPV was allotted 15.13 acres on a lease basis.
According to the state government’s notification on January 27, 2005, APIIC holds 26 per cent equity in each of the SPVs while 74 per cent stake would be held by Emaar Properties. APIIC’s equity is in the form of land valued at ' 29 lakh per acre for the township project. Thus, in the township project, APIIC’s investment stood at ' 75 crore in 2005.
Lease rental for the land given for golf course and as well as the convention centre and Novotel hotel was fixed at 2 per cent of the gross revenue for a period of 33 years and 3 per cent for the next 33 years. Both the assets go back to the government after the lease period of 66 years.
The state government had reportedly reduced the APIIC's stake from the original 49 per cent to 26 per cent so that the corporation need not have infuse additional capital towards development costs.
Current controversy
However, what triggered the current controversy is Emaar Properties entering into an agreement with Emaar MGF according to which the latter will receive 75 per cent of gross revenue generated from EHTPL comprising construction of over 350 luxury apartments and about 125 villas. Objecting to such an agreement, APIIC had served a legal notice on Emaar last month.
The issue took a new turn with three legislators of the ruling Congress party stating that “it is a '10,000-crore scam” and demanding an inquiry by the Central Bureau of Investigation. Subsequently, Panchayat Raj minister, B Satyanarayana and Telugu Desam Party president and Opposition leader, N Chandrababu Naidu, have also sought an inquiry into the entire episode.
“APIIC has issued the legal notice in haste, based on partial information and without understanding the facts,” Emaar MGF chief executive officer, Shrikant Joshi, told Business Standard
“APIIC has not disputed or challenged the existence of the development agreement with Emaar-MGF, and has in fact acknowledged the development activities carried out by Emaar MGF under the terms of the agreement,” he said adding that Emaar had adhered to all the existing and applicable procedures envisaged in the agreement. APIIC chairman, however, said Emaar had violated the joint venture agreement by roping in Emaar MGF “without the knowledge of the APIIC.”
Stating that the development agreement was detrimental to the interests of APIIC, Subrahmanyam pointed out that according to the development agreement between Emaar and Emaar MGF, the APIIC would now get only 26 per cent of the Emaar’s 25 per cent share in the revenues. Had the project been executed as envisaged by EHTPL, APIIC would have got 26 per cent share in the total revenue.
According to Subrahmanyam, Emaar has raised a loan of ' 150 crore from a bank by mortgaging 14 acres of the project land. Normally, banks give loan only up to 50 per cent of the value of the mortgaged property. Thus, the 14 acres of land could been valued at ' 300 crore. This meant each acre had been valued around ' 21.5 crore. At this rate, the value of the 258 acres allotted to EHTPL would be over Rs 5,528 crore.
He said Emaar had so far sold 133 plots of EHTPL meant for construction of villas. Going by the registered sale value, the plots were sold at ' 5,000 per square yard. But Emaar has not deposited any amount with the APIIC so far. “They should have paid at least ' 1,000 crore but they did not. They have only paid ' 9 crore towards lease rental,” he said.
APIIC vice chairman and managing director, BR Meena, said “the issue is under scrutiny and hence I can't say anything now.”
Emaar MGF CEO said over 85 per cent of the land transferred to EHTPL was barren government land. Less than 15 per cent was private land. The land was transferred at the then prevailing market price. APIIC has already received ' 7.5 crore of revenue share from the Hyderabad International Convention Centre (HICC), Novotel Hotel building and the golf course, while Emaar's cumulative loss on the project was ' 80 crore.
Additional investments
Joshi explained that Emaar MGF was roped in as the project needed additional investments. Surprisingly, he said the project outlay as well as the cost-sharing mechanism were not worked out when the joint venture agreement was signed. He, however, confirmed that the company had raised ' 150 crore by mortgaging 14 acres of the project land.
So far, he said, Emaar and Emaar MGF had invested ' 900 crore in the project including ' 150 crore in the golf course and ' 300 crore in HICC and Novotel hotel.
He said the township project comprising a built-up area of 1 million sqft would be completed per schedule by June 2011. The company had so far sold over 200 apartments at a rate of ' 5000-7000 per sft. The project accrued a net profit of ' 8 crore in 2009-10 and was expected post a profit of ' 16 crore in the current year.
Meanwhile, Subrahmanyam said, APIIC, had constituted an internal committee with the company secretary, general manager (law) and the project in-charge to study the entire issue.
Why the issue had cropped up now, nearly four years after roping in a co-developer ? “Politics in the state are different today. We are taking the beating,” Joshi said.
Ironically, Emaar, which is known for enjoying political patronage in the state, seems to be now at the receiving end.
