Indian market ‘not transparent'
The struggling real estate industry in India lacks transparency with companies less than clear about property dealings and how they account for development projects, it is claimed...
Securities analysts are scrutinizing companies' accounting methods and transparency and, in many cases, finding them wanting. Listed property companies could face bankruptcy in the face of deteriorating conditions, it is also claimed.
'With weakening property demand and a difficult business environment, we believe bankruptcy risk is rising for listed property companies,' according to a report by Mumbai-based Kim Eng Securities India Ltd.
In its report, Kim Eng drew attention to accounting practices common in the sector that it describes as 'suspect'.
One such practice, which is permitted under Indian accounting standards, is that some of the cost of interest on land banks and unfinished projects can be accounted for along with the company's assets. That temporarily boosts earnings by reducing interest expenses and adds to book values, making it appear that the company's land holdings and unfinished projects are worth more.
Later, the interest cost would be charged against profits and no longer counted with the company's assets, said Jigar Shah, Head of Research for Kim Eng in India.
Another area of concern is transparency. Credit Suisse says in a report that the Singh family, which holds some key management positions at DLF, India's biggest listed property company, and owns a large chunk of the company, has privately controlled entities from which DLF buys land.
DLF has 'no transparency in the land acquisition process', Credit Suisse said. Credit Suisse said that, in general, there is a higher risk of corporate-governance issues when a deal is with a related party.
Credit Suisse analysts said they believed DLF's disclosure of its land holdings in its annual report is inadequate.
In response a DLF spokesman said DLF has never bought land from its main shareholding family or any of the family's companies. 'All related party transactions are disclosed completely,' he said.
Source: www.propertywire.com