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The second half of 2011 seemed to indicate that the salaried segment of realty buyers were beginning to come out of their post-Lehman blues, especially related to their job security.
By 2012 it was clear that the fastest moving product segment in the realty sector was the home targeted at the salaried segment, with a budget between Rs 5 million to under Rs 10 million.
Leading housing development companies across the cities, of course excluding Mumbai where one would have to look at Borivali-Thane-Navi Mumbai, ensured they had sufficient representation in this product segment. But it was only expected that the Budget this year recognised the need to give a hand to first-time home buyers within a segment below this –Rs 2-4 million – by giving an income offset on interest payments up to Rs 100,000 per annum for the next two years.
There has been a fair bit of action over the past three years in the affordable homes segment, usually priced between Rs 1 to 2.5 million, and the buyer, typically, has been the middle-class Indian with surplus funds who used this as an investment opportunity. The danger of these homes getting delivered to such typical investors is that one could end up with ghost towns that eventually start getting run down more quickly than a community of end-users who have the passion to preserve their common amenities. Hopefully, the tax sop will assist in creating a stronger end-user base, the effects of which will be felt across segments.
The realty sector across the country has been under pressure in the premium and luxury bands – homes costing Rs 20 million and more, except Mumbai where it would be Rs 35 million and more – and industry has been seeking a streamlining of the multiplicity of taxes. However, the government is yet to propose any changes.
Concerns abound on the procedural hassles of deducting 1 per cent tax at source on property transactions exceeding Rs 5 million.
While the Budget has been fundamentally sound for the realty sector, with an emphasis on long-term stability of the sector, one could not fully understand the rationale behind the introduction of Section 43CA.
Simply put, it would mean that:
- Land owners going in for joint development of their land would need to pay up capital gains taxes on the whole property akin to a sale, at the time of signing the agreement.
- The developers may have to pay income tax at guideline values even if sold for values below guideline, as is a norm in pre-launch sales
- The incidence of income tax may be front-ended for the full value of the property as soon as an agreement of sale is signed.
The debate continues on the interpretation but if this were true, it would put a lot of pressure on the liquidity situation of developers and, in turn, would lead to a reduced pace of development/supply besides litigation.
Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore-based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.
Guest Column 
A Fine Balance
by Ran Chakrabarti
Budget 2013: An eye on the polls.
P. Chidambaram delivered his eighth Budget as Indian finance minister last week but was it any different from the last seven?
It was a budget taxing the high earners indeed in the name of ‘being supportive’ to the government’s recovery model. His two-hour Budget Speech in Parliament could not hold the attention of investors (both foreign and domestic) after the initial 20 minutes. It was evident that the Budget was inward-looking for reasons obvious as foreseen for mid-2014 – the General Elections. Each positive was followed by a few negatives.
It disappointed foreign investors by failing to deliver a much-anticipated cut in withholding taxes for debt investments and creating confusion with a proposal that appeared to target tax treaties. Some commentary was made about a Cabinet committee on foreign investments and its regular reviews on policy hurdles, specifically on investments made in energy sector.
There was also some incentive for corporates (both foreign and domestic) that invested more than $25 million on plant and machinery in the financial year 2014, by offering them a tax break equivalent to 15 per cent of the amount invested. But it was soon followed by an announcement on an increase in surcharge from 2 per cent to 5 per cent for foreign companies that pay a higher rate of corporate tax – above 40 per cent.
Similarly for the year 2013-14, domestic companies with taxable income in excess of Rs 10 crores per annum will pay an additional 5 per cent surcharge to be able to help the government recover growth.
To attract Investment in long-term infrastructure bonds in foreign currency, the tax rate with interest was reduced from 20 per cent to 5 per cent, which could be extended to any investment made through a rupee-denominated Indian bank account on long-term infrastructure investments in India.
To invite sovereign wealth funds, university funds and pension funds, SEBI (Securities and Exchange Board of India) is to simplify the registration process for such portfolio investments but this was not substituted by any timeline so it is safe to assume that this was just an announcement without much follow-up.
On the other hand, luxury for the aspiring Indians has become a bit more out of reach as import duty on automobile, yachts and mobile handsets will significantly go up.
It seems that (British Prime Minister) Cameron’s visit did not have much impact on the decision makers. This fiscal year will see the lowest defence budget increase in the last three decades, with just 5 per cent hike. This may indicate French Rafale over Eurofighter Typhoon if we go by simple logic.
Also, there was a special mention of Indian and Japanese collaboration – on the Delhi-Mumbai industrial corridor and the recent initiative to start work with the Japanese on scoping out the opportunities along the Chennai-Bangalore industrial corridor. But there was no mention of a possible collaboration with the UK on the Mumbai-Bangalore industrial corridor.
Having said that, what might interest UK companies is the announcement on using solid waste to produce energy where British service providers can bid for such projects , i.e. before Veolia gets in; and the decision to expand Indian port capacity to 100 tonnes by the year 2016.
Chidambaram quoted Stieglitz in the opening statement: “A country’s most important resource is its people” and what followed from there on was handouts for every possible interest group.
In June 2012, the Indian industry in its dialogue with the government via FICCI (Federation of Indians chambers of commerce and Industry) suggested that the government should “eschew the temptation of a premature welfare state and announce an immediate moratorium on any additional expenses on doles as the country can ill afford hand-outs”, but it was clear from this Budget that the voting constituency were a priority indeed.
The 2014 government expenditure will be 29.4 per cent more than the annual expenditure in 2013. Some of the programmes that would use this expenditure were women development banks, wider coverage for social security that includes health, disability and old age, public sector insurance offices and public sector bank branches in every township with a population of 10,000 people and an expansion on the remit of a post office etc.
Youth vote was also a focus point in the Budget, with announcements like social entrepreneurship with a fund worth $ 3.8 million set up to invest in technology innovations. Funds announced for skill development and sports coaching institutes were a few other such youth-centric programs.
With the above synopsis it wouldn’t be wrong to conclude that the Budget is election safe with no reform agenda for investors. The UPA government might have an inclusive Budget, but it remains uncertain if it can create growth and sustainability.
Ridhika Batra is the London-based Director of the Federation of Indian Chambers of Commerce and Industry (FICCI) for the UK and France.
*The views reflected in this column are personal.
Guest Column 
An impetus for growth
by Amarjit Singh
A first-hand account of David Cameron's India mission.
In the previous article we shed light on some of the perils of the Indian microfinance sector, ranging from management short-termism to mission drift. To start the sequence in the discussion of these critical factors it is fundamental to introduce the models of microfinance in India.
Microfinance, as we traditionally knew it, received its name by providing the borrowers with tiny amounts of loan to establish or run existing micro-size businesses, usually in the informal sector.
This existed already in the 1970s and was pioneered by the State Bank of India (SBI) in Andhra Pradesh. As the sector evolved, the term microfinance was inter-changeably used for poverty alleviation, financial inclusion, women's empowerment, and recently for venture philanthropy.
How do we thus find our way among the buzzwords and really understand what microfinance entails and what purpose it serves?
From purpose to models
The key to navigate the microfinance sector is to define the purpose for which the microfinance Institution (MFI) was established. The very same determines its legal form, ownership structure and investors, success indicators (or expected impact) and most importantly the way they approach clients.
1. Self Help Groups – women's empowerment:
Decades ago, the social development advocates found women empowerment as the utmost priority, which led to the formation of Self Help Groups (SHGs). This way, groups of 10-15-20-40 (depending on which Indian state we consider) women got the chance to get heard outside their homes, and established a platform to exchange information. Often the role of SHGs moved beyond the purpose of awareness building or representation and they also started small businesses. Plenty of successful activities, including community service such as street cleaning, garbage collection, gardening etc, were carried out by these groups and provided livelihood for its members.
There was another great advantage of the SHG structure; the ability to mobilise savings and deposit those in local public sector unit (PSU) banks. In fact, this is the only model, where the current regulation permits that group members deposit savings in a bank through the MFI. (If we think about it, isn't the ability to save the most important pre-requisite of financial literacy? Think of the American home-owners before the real estate crisis.)
This model has limitations on many fronts though, such as the lengthy and complex loan disbursement process, the limited amount of loan an individual can take and the complexity of the group decision-making process on what the loan is to be used for. The not-for-profit nature of the MFI, which nurtures these groups, also puts a constraint on growth in terms of attracting commercial capital.
2. Joint Liability Groups – inclusive finance:
This is the gift of Professor Yunus to mankind, which got him the Nobel Peace Prize. In a JLG, five women join together with the purpose of morally guaranteeing each other's individual loans. All of them supposedly start an economic activity and use the loan for productive purposes. This model ensured that microfinance in India showed unprecedented growth and investment opportunities for foreign and domestic venture capitalists. The key to this form of microfinance is that it is quickly scalable, especially in densely populated area. Also, in groups of five it is easier to take decisions than in groups of 20, and one village usually has six to eight groups ready who are keen to take loans. That usually ensures operational efficiency.
This form of loan disbursement is straight forward and simple to understand for women who previously have been involved in SHG activities (see above). If executed well, the MFI has a true potential to include a large number of clients in a sustainable way, at the same time they are able to attract commercial capital.
The downside of it is the extreme temptation for the founders and investors of these entities to earn quick and huge profits. The quick establishment of the new customer base results in due diligence to fall short and fraud within the organisation becomes a threat. The JLG model requires the MFIs, which are mostly commercial outfits (NBFCs), to invest in robust technology and professional staff, which is expensive and often compromised upon to cut costs.
Due to the unsecured nature of the microloans provided to group members there is a limitation on the loan size, usually not larger than Rs 16,000 per loan cycle. Beyond this, the lending organisation finds it risky to lend. However, viable businesses need clearly more capital, especially at the start-up phase. This results in the clients' readiness to borrow from three, five and occasionally from more MFIs, which has also led to the well-known Andhra Pradesh crisis in 2008.
In India, the above two models of microfinance prevail based on the purpose they serve. There are more legal forms of lending, such as cooperatives, lending through industrial associations etc, but the larger goal remains the same – providing access to affordable finance.
When vehement debates erupt in the industry on whether SHG or JLG is the one to be followed by all and declared by the regulator as the way forward, one has to remember the extreme differences the two models were founded upon.
Community building and social development (SHG) is rarely the focus of commercial entities, while quick client acquisition and large capital flows (JLG) hardly leave room for teaching financial literacy and develop the micro-businesses to formal entities. There is a delicate balance though between the two and the question remains: who will be the winner that can serve both?
In summary, the SHG model is suitable for those communities who have not been involved in any type of financial inclusion or social development program. It requires a longer period of time to produce tangible impact, but once it does, it is usually for the long-run. Its value lies in the strong potential to mobilise communities and revitalise economic activities in the particular village.
On the other hand, the JLG model is perfect for those who need cash quickly and demonstrate some ability to repay based on a microenterprise. Not everyone is suited though to become a business owner, so one of its drawbacks is the establishment of quasi-enterprises in the hope of accessing money. This model has no long lasting impact for the customer unless the businesses grow and create employment for others.
Understanding the various models of microfinance is just the first step towards discovering what contributes to the status quo in the Indian financial inclusion agenda. In subsequent articles, we will discuss what organisations are like from the inside and whether high-end technology can offer a remedy to some of the challenges faced by them.
(This article is part of a series discussing the perils of the Indian microfinance sector, and attempts to suggest ways to improve its performance.)
Neishaa Gharat is the voluntary director of Project Crayons UK – a UK charity that supports children, young people and women in India through knowledge sharing, enabling partnerships, collaborations, fundraising and volunteering opportunities. In this regular Shades of Money column, she will be exploring aspects of socially viable growth prospects in an increasingly globalised world.
She invited Anna Somos Krishnan to share her thinking about microfinance in India through a series of thought provoking articles. Anna is currently an independent economic and social development consultant based out of Hungary and India. She has assisted the operations one of Hungary’s first microfinance establishment and headed their strategic unit between 2010 and 2012. Prior to this she worked extensively in the Indian microfinance sector as the executive director of Planet Finance India, an independent development consultancy firm.
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It's not a junket, a jolly, an escape from domestic issues when a Prime Minister visits another country, and especially not when he visits India. Cynics will never see the opportunities. Winners will. Winners make opportunities.
So on the recent trip by the British PM David Cameron to India, the reason it was a success is simple; and it is identified in the Telegraph as a role model for how to get the most from such trips – if only more could go on them!
As the Telegraph says, "People will take what you say at face value if they're meeting you in that context, because the assumption is that you've been vetted and checked out if you've been invited on such a trip," said Daniel Ishag, chief executive of Bluewater Bio, a water-treatment technology company.
"People have asked us, 'why go with the trade delegation, you already have a partner?'," said Ishag. "But in high-growth areas like India, businesses have to take the initiative. You're in the country, go and get the meeting, grab the opportunity while you've got the endorsement of the UK government."
Ishag has also had a positive experience working with UKTI. His company won the lead role on the biggest water treatment upgrade project in the Gulf, a site serving 800,000 people in Bahrain, with the help of the government organisation.
I am pleased and proud to say that "the government organisation" Daniel speaks of is the Global Entrepreneur Programme, and I am the 'dealmaker' responsible for helping them.
Want to know what a dealmaker does? Well, helping get that Bahrain contract is one thing. But with a company like Bluewater where they are quick to jump on opportunities, it makes life easier for a dealmaker.
www.alpeshblog.com
Alpesh Patel read Modern Greats at Oxford University (now better known as Philosophy, Politics and Economics). He is a former Visiting Fellow in Business at Corpus Christi College, Oxford, and alumnus of Boston University, and lectured in China, Hong Kong, Singapore, Guatemala and India on global economics. He has a degree in Law from King’s College, London, and is the author of 13 books. He is the founder of private equity and hedge fund firm, Praefinium Partners.
The Indian Parliament is likely to discuss the Real Estate (Regulation and Development) Bill in its upcoming Budget Session. Although the draft Bill has been pending since 2009, if passed as anticipated in 2013, it is likely to inject transparency and accountability into an industry which needs to institutionalise consumer protection.
One key proposal is to create a regulatory authority for the sector in each state. In particular, the proposed Bill will compel development to disclose project details and contractual obligations, and declare the status of the relevant clearances needed. Failure to do so may result in the developer paying a hefty fine of up to 10 per cent of the cost of the project or, worse, prison. The Bill may also introduce an "escrow-lite" facility whereby the developer must hold a high proportion of funds in a particular bank account, to ensure a more accurate money trail. I hope that in the future, the government can also consider allowing retail investors to invest in REITs, but again this proposal has been on the cards for many years.
After the reduction in Reserve Bank of India repo rates in 2001, India's property market at first grew slowly, and then boomed. But it took until 2005 for average house prices to reach their previous peak of 1996. The next chapter in real estate's growth, however, needs to address some significant challenges. Due to the lack of regulations and effective policies, and lack of clarity on some land titles makes investors - particularly foreign investors - nervous.
One such example that has spooked investors is the announcement last week by the Securities and Exchange Board of India (SEBI) that it could freeze up to $3 billion of real estate assets from the Sahara Group, following the Supreme Court's agreement with SEBI that Sahara had masked a bond issuance in 2011 as a private placement in order to avoid regulatory scrutiny.
At international property investment firm Unesta's conference in London last week, Yomesh Rao, its executive director, spoke about the need to sometimes acquire up to 50 permits from various government departments before the construction of a project can begin. On the one hand, the progress of each permit is trackable by potential investors online via http://goidirectory.nic.in, which is a significant improvement for consumers. On the other hand, 50 permits is still a ridiculous figure, and that it can take up to two years to obtain these permits is equally absurd for a market the size of India.
Vikram Goyal, managing director of Unesta - offering India property services, said careful homework by investors can lead to better returns and easier liquidity, especially in urban areas. He added: "A quick survey of the other developments within the vicinity will help evaluate if the area has the real estate potential and also help understand the demand vs supply housing dynamics in the region. It is advantageous if the project has been pre-approved by a reputed lending institution."
The reasons for investing remain the same as they were in the previous boom in 1995-1997, before the stock market and real estate markets crashed in quick succession - favourable demographics, higher disposable incomes, negative real interest rates, excess demand of land especially in urban areas. But one factor is different this time - the emergence of a more favourable environment for real estate investment, such as the policy change to permit up to 100 per cent foreign direct investment (FDI) in real estate projects.
Overseas investors have invested $14 billion into the Indian real estate sector over the period from 2006 to 2012, according to Alastair Hughes, Asia-Pacific CEO of real estate consultancy firm Jones Lang LeSalle.
Around half of these were invested in residential property and a quarter in offices. Hughes reckons that in 2013-14, there will be foreign investment of $4-5 billion, mainly to buy income-yielding Special Economic Zone assets. This figure could well be an underestimate if much-needed regulatory reforms are pushed through Parliament in pre-election year 2013.
Pratik Dattani is managing director of EPG Economic and Strategy Consulting and also runs a large not-for-profit organisation with strong links to India. He is an economist whose work focuses on helping organisations and investors understand social returns and impact investments.
More info: www.economicpolicygroup.com
Columnists
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Manoj Ladwa is chief executive of MLS Chase, an India-focussed professional services organisation More |
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Alpesh Patel is founding principal of India PE fund, Praefinium More |
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Pratik Dattani is managing director of EPG Economic and Strategy Consulting More |
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Neishaa Gharat is voluntary director of Project Crayons UK More |
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Anjalika Bardalai is an Asia analyst at political risk consultancy Eurasia Group More |
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Nitin Dahad is a consultant and adviser in the electronics, semiconductors and wireless industry More |
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Shai Vyakarnam is Director of the Centre for Entrepreneurial Learning at Judge Business School, Cambridge University More |
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Julian Stretch OBE is chairman of the India Briefing Centre More |
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Role of a Private Banker by Sonjoy Phukan Preparing the Next Generation by Sonjoy Phukan |
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The Business of Cricket by Shiv Morjaria Gujarat - Beyond the hype by Shiv Morjaria |
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Stronger, Wider, Deeper by Nick Baird Read More... |
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Entrepreneurship as an engine by Sanjeev B. Ahuja Catalysts of growth by Sanjeev B. Ahuja |
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RBI & MoF put squeeze on FDI by Arup Ganguly India's Mid-Cap Growth Engine by Arup Ganguly From Equities into Bonds by Arup Ganguly |
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Due Diligence in Emerging Markets by John Carnt Read More... |
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Can India Develop a Third Way? by Uday Phadke Read More... |
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The Low Carbon Growth Story by Lord Green Read More... |
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Would the switch from Right to Left change the Centre? by Ridhika Batra What's the scope; is there any hope? by Ridhika Batra India finds its niche in the G20 by Ridhika Batra FDI in retail: Let's lend our ears for once by Ridhika Batra |
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Reforms: Welcome, but just not enough by Ran Chakrabarti Read More... |
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Entrepreneurship as a 'career' by Dinesh Dhamija Read More... |
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Good for corporates, & the community by Yuki Lo Read More... |
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Films mean business by Joseph D'Morais Read More... |
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Indian economy update - Looking ahead to 2013 by Munesh Khanna Read More... |
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The Social Capital with Vikas Pota
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Book Reviews
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Indian Powerbrands by Arindam Chaudhuri and Abhimanyu Ghosh Read More... |
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India - A Portrait by Patrick French |
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Making a Fortune: Learning from the Asian Phenomenon by Spinder Dhaliwal |
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Speaking of India – Bridging the Communication Gap When Working With Indians by Craig Storti Read more... |
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Woman: Acceptable Exploitation for Profit by Sheila Flather Read more... |
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A Look Into Recessions, Business Cycles and Financial Crises Read more... |
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The Eagle and the Elephant by Raymond E. Vickery Jr. Read more... |
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Namaste Mr Cameron; clarify the confusion and let's get down to business
David Cameron, the UK prime minister, has landed on India soil. This is his second visit since he became prime minister in 2010. He brings with him the largest ever delegation of British business accompanying a UK premier. Clearly he is a man on a mission. And India is important.
I was asked on BBC Radio this morning whether the UK needs India more, or whether India needs UK more. Indian PM Manmohan Singh has thus far not led a delegation to the UK under David Caneron's watch, and I don't hear speaking about doubling bilateral trade with the same vigour (though Manmohan Singh is not a man of many words in any case).
But clearly by the overtures, the UK is doing all the chasing.
The reality is that both countries need each other – for both economic and strategic reasons. And even if they didn't, age-old relationships of this nature don't just fizzle away – well David Cameron certainly does not want that to happen, and I am sure the Indians don't either.
The timing of visit is, however, not ideal. It comes in the midst of a huge corruption scandal involving UK-based Augusta Westland. The allegation being that Augusta Westland paid bribes to Indian officials to win a major helicopter manufacturing contract. David Cameron will rightly be seeking to save the deal and therefore save UK jobs. The Indians don't seem to be in a mood to listen. They want answers.
Europe
The visit also comes on the back of growing confusion in India over the UK's position in Europe. There are now over 700 Indian companies with a presence in the UK. Of these 70 are listed on the London Stock Exchange.
The UK has always been viewed, and indeed marketed, by the UK as a natural launch pad for Indian companies into the European Union. The question therefore Indians are asking after David Cameron's recent referendum announcement is whether the UK backs the EU or not? It is after all India's largest trading partner.
Companies need to make long-term decisions. The ambiguity does not help.
Immigration
Domestic rhetoric in Britain on toughening immigration rules has also confused a lot of Indian business people. Indians are saying you want our business, but you don't want our people. David Cameron will have a lot of explaining to do. But he is doing the right thing. He is engaging with India. He is talking of a genuine partnership and building on his last visit, and the work started by previous UK governments.
Deeper Relations
There has been a consistent push by the UK for greater relaxation of foreign direct investment (FDI) norms, particularly in the financial services and insurance sectors. I don't think we will see any major concessions from the Indian government on FDI policy. Why would they make such major policy announcements during a UK prime minister's visit? I don't think any one expects that either.
David Cameron should stick to the theme of deepening existing relationships rather than talking about some kind of vague fluffy special relationship. Talk about partnerships, about capital flows (after-all London is the world's leading financial hub) and deepening partnerships through technology collaborations. He should also be talking about working with regional governments such as Bihar and, of course, Gujarat.
Frankly, visiting Delhi and Mumbai lacks certain imagination. He could have been more imaginative and hosted a roundtable with some of the states where British interests are significant. That is where the real growth is – rather than play safe in Delhi and Mumbai.
Jobs and Skills
He should clarify his position on immigration and Europe. But if he wants to see a major push in UK-Indian trade and investment, I would like to see him announce a special boost to support job creation and skills development in both countries. That is the key and the core of a sustainable long-term and deep partnership.
I am off the Delhi now to join the jumbo delegation and hopefully help in getting everyone down to business.
Manoj Ladwa is the founder of MLS Chase, specialising in legal and corporate advisory services @manojladwa
