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DB Realty to be sure, isn’t the poster boy of India Inc that you will normally have marquee names of corporate India queuing up to tie-up with. The company has had run-ins with regulators and central agencies, its performance has been nothing to crow about, and it has seen a lender call it a wilful defaulter.

Given this, the recent activity seeing prominent names like Prestige and Godrej groups strike deals with the Mumbai realtor, is definitely not something that can go unnoticed.

What is the real plot? What is going down at DB Realty? Why are marquee realtors lining up at the door? While we don’t have the real answers to these questions, we’ve tried to piece together a narrative from publicly disclosed information.

THE DB REALTY MESS

DB Realty introduces itself as a real estate developer with an “expanding portfolio comprising about more than 100 million sq. ft of prime property” in Mumbai. That is its big plus. The minuses are many. The group has been accused of money laundering, it has been under the scrutiny of the Income Tax Department, it has been accused of not paying lenders and it has not seen any significant progress on its projects, bringing into question its very existence. Those are all reasons that would normally spook any prospective partner. Yet, it has been striking marquee deals.

Let us take a quick look at some of these issues.

The Money Laundering matter: CBI as well as the Directorate of Enforcement have filed Criminal Leave Petitions before the Hon’ Delhi High Court against release of attached properties.

The adjudicating authority had attached assets of Rs 7.14 crore on August 2011. Consequently, bank balance of Rs 69 lakh, two flats with written down value of Rs 88 lakh and optionally redeemable preference shares worth Rs 5.5 crore were taken over. There was no new development on this case in the September ended quarter 2021.

On this the company has said: “As regards certain allegations made by the Enforcement Directorate against the Company and its two Key Managerial Persons, in a matter relating to Prevention of Money Laundering Act, 2002, this matter is sub-judice and the impact, if any, of the outcome is unascertainable at this stage”.

Run-in with the Taxman: In its September quarter filing, the company reported that the company’s and KMPs premises were searched by Income Tax department and certain documents have been taken by the department. There is no clarity on how significant or serious this matter is.

Lender trouble: DB Realty given its precarious finances has naturally seen lender trouble. In September 2020, Bank of India named its subsidiary, Pune Buildtech, a wilful defaulter with respect to a Rs 225 crore loan given in 2013. In its September 2021 quarterly filing, the company has indicated that “The installment as per the settlement letter with one of the lender which was due subsequent to quarter end has not been paid and the company is in discussion with the lender and has sought extension of the repayment dates. The response from the lender is awaited”.

The company’s auditors too point to its fragile finances in their report for the September quarter. First, the company has provided guarantees to lenders of Rs 4026 crore (this ties in with Rs 4130 crore of total consolidated dues at the end of Q3-FY21) for credit to its various subsidiaries. But what’s more worrying is the auditor’s observation on this: “Some of the entities have defaulted in the repayment obligations of principal amounts aggregating to Rs 780 crore as on September 30, 2021, however as per management, in view of value of primary / underlying assets provided as security being greater than the loans outstanding, the liability will not devolve on the Company”.

What’s more, worrying is this: “Company has debt repayment obligations (including interest thereon) aggregating Rs 1328 crore within the next twelve months. The said assumption of going concern is dependent upon the Company’s ability to raise funds through monetization of its noncore assets, mobilization of additional funds, progress of various projects undertaken through subsidiaries, joint ventures and associates, and other strategic initiative to meet its obligations. These conditions indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern”. This makes it evident that DB Realty needed to act quick to prevent action from creditors and to prevent losing its “going concern” tag. And the Rs 1575 crore proposed to be raised via the Godrej and Prestige group deals, was likely aimed at addressing this issue.

DB REALTY SHAREHOLDING

Shareholder

With Godrej Properties

After Godrej Exits

Promoters

54.08%

60.08%

Pinnacle Invest (Prestige Group)

17.97%

19.98%

Public Shareholding

17.97%

19.94%

Godrej Properties

9.98%

0.00%

Fund Raise (Rs cr)

                                        1,575

                              1,175

No progress in business: The other matter of concern is that the company has made no headway in execution. The auditors point out: “There is no progress in the development of projects undertaken since last several years and the Company has also incurred cash losses before exceptional items during last three years as well as there have been defaults in repayment of various debts and other obligations (including statutory dues)”. This suggests that DB Realty has been caught in a catch-22, with no cash flows from operations (cash outflow from operations at Rs 97 crore in the half-year of fiscal ending March 31, 2022) and mounting debt obligations with a ticking interest cost.

TIME FOR STRATEGIC DEALS

It is evident from the recent deals that DB Realty has managed, that there is value in its project bank. And over the past year, it has been striking deals to try and emerge from the quagmire. In the annual report for fiscal ended March 2021, the management points to deals with Prestige group for DB BKC Realtors, that is executing a project at Tata Colony, BKC and for Turf Estate Joint Venture LLP, in which Prestige has acquired an equal stake. These helped the company provide an exit to earlier partners, and put the projects on track. It also inked a deal with Rustomjee group to transfer its DB Crown project in Prabhadevi, which has been rechristened Rustomjee Crown.

Some of the company’s other prime projects are: DB Ozone (Dahisar), X BKC (BKC), One Mahalaxmi (Mahalaxmi) and DB Skypark (near Mumbai Airport). And it isn’t clear if the company will seek out more partners for any of these.

THE GODREJ VS PRESTIGE DEAL

The street’s reaction to Godrej Properties planning to invest Rs 400 crore in DB Realty and another Rs 300 crore in a joint venture for slum rehabilitation with the infamous Mumbai developer, was one of grave concern. The key gripes were the need for investment in DB Realty for a project-focused relationship, and a foray into the risk-prone slum rehabilitation segment. Godrej Properties after urgent deliberations by its board, decided to call off the deal. It has, however, kept the window open for project-specific agreements.

That’s fine, but why wasn’t there any hullabaloo about Prestige group’s agreements with DB Realty? The answer seems to line in the structuring. The stake in DB Realty by Prestige group is being acquired by a promoter group entity, Razack Family Trust, but the projects are being undertaken by an arm of the listed entity, Prestige Falcon Realty Ventures. This kept the investment in the parent separate from the project development business, which remained with the listed company.

In its annual report for fiscal-ended March 31, 2021, Prestige Estates states clearly indicates its investments in DB Realty’s project entities: “The Company through its wholly owned subsidiary Prestige Falcon Realty Ventures Private Limited has acquired 30.21% of the equity share capital and 20,961 Series B redeemable optionally convertible cumulative preference shares representing 4.57% of the redeemable optionally convertible cumulative preference share capital of DB (BKC) Realtors Private Limited… (it has also) invested through capital account contribution in Turf Estate Joint Venture LLP as a new partner in the LLP with 50% share of profit and losses… (and) has acquired 50% of the equity share capital of Pandora Projects”.

WHAT REMAINS UNANSWERED

What gave the Godrej and Prestige confidence to sit across the table with DB Realty team and strike big deals remains a mystery. Are lenders driving the agenda? Do these marquee developers have assurances that give them confidence? What are these assurances?

There is also the question around the current fund raise by DB Realty. For one, 64% of the promoters’ shares are pledged. Will they pledge more shares? The unpledged value of the promoters’ equity at current market value is about Rs 550 crore and the implied value of the warrants to be subscribed to is Rs 160 core. To be noted here, though, is that the pledge of the company’s shares have declined since December 2020, when it was at 70.84%, and the number of shares held by them has gone up. So it seems the promoters have other sources of funds, and there is pressure to bring more in to keep the business going.

Given this, the other big question is: What is the DB Realty endgame? Will it just hive off projects till it fixes its finances, or is there something more? It is important to note here that if Godrej had proceeded with the deal, along with Prestige group they would have owned 28% of the company’s equity, which would have allowed them the right to block any special resolution. Investments in the parent, notably, will allow DB Realty to move funds to entities with obligations but little interest from the partner developers, and this could have been one of the asks. Remember, the company has debt obligations of Rs 1,328 crore over the next twelve months, against a revised raise of Rs 1,175 crore, after Godrej backed out. So, are there more such deals in the offing at DB Realty to bridge the gap? Will these change the shareholding equation significantly?

There is little clarity around all the above questions, but we hope for at least some answers in the coming days.

WHAT OF SHAREHOLDER VALUE

Has Godrej Property preserved or compromised shareholder value by calling off the deal? The jury is out on that one. Presuming there was enough thought that sent behind the deal and there were clauses and conditions that provided comfort on value creation from the deal, letting it go may actually compromise partly the value that could have accrued to shareholders. We’ll know either way in time. For now, what seems to have been addressed is the concern of shareholders over the structure of the deal, which it may well be the parties are unable to disclose due to non-disclosure agreements, and may or may not be prejudicial to shareholder interests. The street will likely breathe a sigh of relief, but whether shareholders really won remains a mystery.

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