How Emaar MGF dodged rules to buy land in Dehradun

How do real estate companies acquire land banks in this country? Often they use means that would circumvent rules and raise many eyebrows.

And, as this story of how New Delhi-based realty major Emaar MGF acquired a Dehradun-based listed entity shows, the methods could be as varied as launching new entities in the name of the company's own employees, issuance of preference shares at a steep premium and cleverly-worded disclosures.

And all this to take control of a pre-Independence company that owned prime real estate in the heart of the Uttarakhand capital.

A Business Standard investigation into the land-acquisition processes followed by realty majors has unearthed an interesting chain of events involving Emaar MGF and a clutch of small, little-known companies.

In the process, it removes the lid on Dehradun's best-kept real estate secret that survived seven long years.

Dehradun Tea Company (DTC), which owns the vast Harbanswala-Arcadia tea gardens on the outskirts of the city, is a 150-year-old firm listed on the Calcutta Stock Exchange.

As is the case with most stocks on the now-defunct exchange, there was hardly any trading in DTC.

But something significant happened to the British-era firm seven years ago. At the time, the company had a paid up capital of Rs 10.2 lakh (Rs 1.02 million) and had a balance sheet size of Rs 8.5 crore (Rs 85 million).

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Its shares were distributed among a few hundred shareholders including several untraceable British names. Four directors and their family members were the controlling shareholders, holding around 45 per cent.

Lay buried in this unimpressive balance sheet was "1,127.48 acres of land owned by the company under tea gardens, factory, coolie lines, self cultivation and fruit orchard, aromatic grasses and under roads. No part is under dispute."

Adding appreciation on a revaluation done in December 1948, this land was valued at a princely Rs 30.27 lakh (Rs 3.02 million) in the balance sheet of DTC.

Real estate experts are unable to put a number on the value of the property in 2006 as many do not maintain a record of prices in specific areas.

A Rediff.com report of April 2006 talks about skyrocketing prices in "recent months". Quoting real estate agents, the report talks of 10-50 times increase in land prices in Dehradun and surrounding areas that year following interest from Delhi-based developers such as "Ansals, Parsvnath and DLF".

Prized property

Today, an 800-square-yard property in the vicinity of the tea estate goes for Rs 2 crore (Rs 20 million), as there is very little fresh supply in the area. An acre comprises 4,840 square yards.

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Though simple arithmetic puts the current value of the 1,127 acre property at several thousand crores of rupees, realty agents say such a huge supply is bound to bring down prices sharply, thereby skewing the equation.

On March 14, 2006, two employees of real estate developer Emaar MGF - Head Legal Surender Verma and Assistant Manager (in the secretarial department) Chintan Dewan - put in an equity capital of Rs 100,000 to float a company called Logical Buildwell, which would later go on to acquire DTC.

Within days of its formation, Logical received a huge dose of cash from Emaar MGF in the form of an unsecured loan.

According to its balance sheet for the year ended March 31, 2006, the company owed Rs 76 crore (Rs 760 million) to Emaar.

On the assets side, this sum appeared as "advance against land." It is not clear from the statutory filings to whom this advance was given.

On May 31, 2006, the shares in Logical were transferred to Emaar MGF Group Financial Controller Vijay Sajjanhar and Assistant General Manager (finance) Gautam Kalani, and they took charge as directors of the company.

Realty experts say that somewhere around this period, the dealmakers realised that buying such a huge tract of land would attract the urban land ceiling act.

Therefore, they decided to buy the company itself. But since DTC is a listed company, it would attract Sebi disclosure requirements.

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How to take the land and avoid the name of Emaar coming up in the disclosure? Simply create another layer of companies. This layer came to the fore in the letter of offer made under Sebi rules.

Less than two months later, on July 10, 2006, Logical entered into a share purchase agreement with key promoters and a few other shareholders of DTC to acquire 54,450 shares or 53.38 per cent. At a price of Rs 15,611 per share, Logical shelled out a little over Rs 85 crore (Rs 850 million).

Three days later, Logical made a public announcement of its acquisition with an open offer to acquire a further 20 per cent.

Being a listed company, DTC was subject to the Sebi takeover code, which mandated the open offer to allow an exit option to minority shareholders. It had to file a letter of offer stating all the material information about the deal.

The share purchase agreement as quoted in the letter of offer shows a "consideration of Rs 15,611.00 (fifteen thousand six hundred eleven only) per share aggregating to Rs 85,00,18,950.00 (eighty five crores and eighteen thousand nine hundred fifty only) for all the transaction shares.

Out of the total shares offered by sellers, 45,010 shares constituting 44.13 per cent belong to the promoter group and 9,440 shares constituting 9.25 per cent belong to non-promoters."

According to independent valuation by auditors, the net asset value of DTC shares would be just Rs 721.99 per share, as on March 31, 2006.

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"Since DTC has no profits in the last three years and no market price is available for the last 26 weeks, the earning- based value per share and market price has not been used to determine the price. In view of the above, the offer price of Rs 15,611 is justified in terms of regulations 20(4) and 20(5) of the regulations," the letter of offer said.

It is not difficult to figure out why somebody would pay several times the book value for a loss-making tea garden.

The land was valuable and Logical's stated objective was to build and develop residential and commercial properties.

"Logical has been incorporated with an objective of owning, building, colonising, developing, promoting, occupying residential, commercial and industrial buildings, colonies, hotels, mills etc," the letter of offer said.

Layer by layer

Explaining the ownership structure of the acquirer, the letter of offer said, "Mr Gautam Kalani and Mr Vijay Sajjanhar hold 5,000 equity shares each, constituting 100 per cent of the paid up equity share of the Acquirer."

Though both shareholder directors were employees of Emaar and the company itself had received a substantial unsecured loan from Emaar, the document significantly adds, "The Acquirer does not belong to any group."

The funding patterns also changed significantly days before the public announcement of the deal was made on July 13, 2006. On July 1, Logical received an investment from two companies, Amardeep Properties and Compact Properties in the form of subscription to preference shares.

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Amardeep and Compact were little more than generous to Logical. Not only did they agree to buy Rs 10 redeemable preference shares of two-month-old Logical, which carried a paltry 0.1 per cent interest, at a premium of Rs 110 per share, they also bought 4 million shares each, thereby infusing Rs 96 crore (Rs 960 million) into the company.

As Emaar MGF's Rs 76 crore (Rs 760 million) "unsecured loan" disappeared from the subsequent balance sheets, one can safely assume that the sum brought in by Amardeep and Compact was used to pay off Emaar. But the Emaar connection does not go away that easily.

Guess who are the promoters of Amardeep and Compact. They are Surender Verma and Chintan Dewan, the same Emaar employees who floated Logical in the first place.

A day before they gave life to Logical, on March 13, 2006, Verma and Dewan incorporated Amardeep and Compact "to carry on the business as owners, builders, colonisers, developers, promoters, proprietors, lessors, civil contractors, maintainers and or residential, commercial and industrial buildings, colonies, hotels, etc. These companies in their pursuit to explore various business opportunities have invested in optionally convertible redeemable preference share capital of Logical Buildwell," the filing said.

But where did these companies get so much money from? The open offer filing gave some clues: "Amardeep and Compact have entered into joint ventures/ business development agreement with various entities under which they undertake to develop integrated township/ real estate and collaborate and develop the land/ market properties for developing similar infrastructure projects. Some such companies with which these companies have entered into such agreements are True Value Buildcon, Active Buildwell, Emaar MGF Land, Acutech Estates."

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The last sentence is the only place Emaar's name appears in the entire disclosure that runs into some 33 pages, though it is the proverbial elephant in the room with its employees floating several companies, borrowing funds from it almost for free and executing the entire transaction. It certainly is not a distant third party in the transaction as projected in the disclosure.

That's not all, while Emaar appears as one of the many companies that Amardeep and Compact have agreements with, subsequent offer documents filed by Emaar for its own IPO reveal that it had a land bank of "1,129 acres in Dehradun."

Although there is no direct evidence to substantiate this, it appears that this land bank is what once belonged to DTC.

Further strengthening the argument that the employees did not have any direct interest in the company, they transferred their shares on par to other employees of Emaar despite knowing the goldmine they were sitting on.

These transfers could have takeover code implications, say experts. Logical has since been renamed into Loam Realtors. Both Kalani and Sajjanhar have quit Emaar. But the company has changed hands within the group's employees.

According to the latest filings, Amardeep and Compact, which have since been renamed Alcove Realtors and Cameo Realtors, own and control Loam Realtors. Alcove and Cameo are 99 per cent owned by Rakshit Jain.

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The final twist

Jain is on Loam's board and also holds shares in several other Emaar subsidiaries. Jain is a close confidant of Emaar MGF Vice-chairman Shravan Gupta and operates as senior general manager in Gupta's office in Delhi.

Jain did not answer questions on the nature of his relationship with the company and if he is holding DTC's new parents in his personal capacity. He also did not respond to an email questionnaire on his acquisitions.

All three-Loam, Alcove and Cameo- have their registered offices at "17-B, MGF House, Asaf Ali Road, New Delhi, 110002."

Kalani said on phone that he quit the company three-four years ago. On Logical, he said, "I would assume they would still be a part of Emaar. Earlier they were."

Sajjanhar, who briefly was CFO of DB Realty, could not be reached. He is said to have taken up an assignment abroad.

While Emaar sources say the disclosures were based on the advice given by merchant bankers, merchant bankers say they were not aware of the holding structure of Logical.

Enam Securities, which acted as the merchant banker for the open offer and was designated book running manager for Emaar's aborted IPO attempt in 2007, has since then been acquired by Axis Bank and operates as Axis Capital.

Email questionnaires and subsequent reminders sent to the Emaar spokesperson and Axis Capital did not elicit any response. Emaar spokesperson said on phone that "the management has decided not to respond to the questionnaire."

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Meanwhile, the vast expanses of Harbanswala-Arcadia Tea gardens on the fringes of Dehradun are blissfully unaware of its high profile owners.

But there is a buzz that the company may go for a land use change in order to build housing colonies. Over the past few weeks, it has got stronger.

"Such rumours keep coming again and again," laughs S P Chaurasia, former chairman of the company, who sold shares to Emaar employees' firm.

But, he is candid that the tea business has no future and the company which controls DTC will one day build housing colonies.

"They spent over Rs 15,000 per share to get the majority stakes. Why should they spend such a big amount on tea business which too is running in big losses?" says Chaurasia.

But changing land use is easier said than done. Chaurasia says the government is scared of changing land use of the tea estate because it will only invite public wrath with environmentalists and NGOs raising hue and cry because the whole area has been declared as a green belt by the government.

DTC strongly denies such rumours and claims that it was trying hard to find new markets for the tea leaves in order to bring a turnaround in the company.

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"I have no knowledge about any type of housing plan on our tea estate. We've also not approached the government in this regard," says D K Singh, director of DTC.

However, Singh laughs off suggestions that the company was diversifying into the realty business. "I cannot control anybody if people keep on guessing like that," he says.

An Uttarakhand government official admits that there have been attempts in the past to change the land use pattern of the tea estate during the tenure of the BJP government (2006-2011).

"We strongly opposed the move to change the land use pattern of the tea estate," says the official.

The then chief minister, Ramesh Pokhriyal Nishank, had landed in trouble after his government accorded permission to change the land use pattern of the Citurgia housing scheme.

As the scandal reached the High Court, the government washed its hands of the tea estate.

There are still nearly 150 workers in the tea gardens, out of which 75-80 are permanent and the rest seasonal, says Singh.

The annual turnover of the company has fallen to Rs 20-25 lakh (Rs 2 - 2.5 million) from a few crore rupees before the acquisition.