DLF, Unitech lack in transparency, key disclosures: Report

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." 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. 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. Besides, there was no transparency in land acquisition process and promoters have privately controlled entities from which Unitech buys land, the report noted, adding that disclosures on land bank and projects under execution were inadequate. About another real estate firm Sobha Developers, the report said it also lacks on the front of transparency in land acquisition process and promoters have privately controlled entities from which the company buys land. "Also, land bank disclosure in annual reports is inadequate," the report said on Sobha, whose key related parties include un-listed firm Sobha City and 47 entities under control of key management personnel. In a significant departure from conservative accounting method, Sobha also recognises revenue on a percentage completion method even where the cash receipt is yet due and capitalises interest expenses during a project's construction. On material related party transactions for Sobha, the report said that significant advances were given in FY'08 to Technobuild Developers, a promoter controlled unlisted entity, for purchasing land on behalf of Sobha Developers, amounting to Rs 540 crore. Sobha also does not disclose detailed accounts of all subsidiaries and it changed accounting policy in the first quarter of the current fiscal, which effectively accelerates revenue. "Previously, the company recognised revenue on land agreements only on the 20 per cent completion of construction. Now, the policy has been changed to recognise revenue on land agreements when 20 per cent of the booking amount has been collected and sale agreements entered into." The report further said that the company has made part payments for land in many cases where the land title still has to be transferred into its name and "its annual report carries very little detail regarding this."