Smart ways being adopted by developers to acquire land

Real Estate developers acquire land through tens or hunderds of subsidiaries or independent entities promoted by their subsidiaries or promoters to acquire such holdings cheap, although the Urban Land Ceiling Act, the original reason for this practice, has been repealed in most states including Delhi and Maharashtra. Emaar MGF has 360 so called entities that account for almost half, or 6,600 acres of Emaar’s land bank. Emaar’s subsidiaries have minority stakes in these entities, but collectively own them. Omaxe Ltd, a company that sold shares to the public last year, has 31 subsidiaries and 169 entities floated by its promoters.

Companies floating multiple subsidiaries is not a new phenomenon in India. In the case of business groups or conglomerates, the holding company itself remains unlisted while some or all of the other firms are publicly listed. The Tata group is a case in point. Holding company Tata Sons Ltd is unlisted while some of the main companies in the group, such as Tata Steel Ltd, Tata Motors Ltd, and Tata Consultancy Services Ltd, are listed. In real estate sector, promoters have listed their holding companies, said Ganesh Raj, head, real estate practice, Ernst and Young.

What is Urban Land Ceiling Act?

The Urban Land Ceiling Act limited the amount of land that could be held by one firm, and while it has been repealed in most states, real estate firms continue to hold land through subsidiaries and entities. That is because, individuals and companies selling land usually demand and expect a bigger price from large developers.

Advantages of Subsidiaries or independent entities

1. Cheaper land acquisition : Bigger price is demanded from large developers. When a well-known developer acquires a piece of land, the value of the surrounding land increases, making it more expensive for the same developer to acquire more land in the area. Acquiring the land through an entity that isn’t immediately associated with the developer addresses both problems
2. Get funding at SPV level :
   Real estate developers claim that holding land under subsidiaries or SPV (Special Purpose Vehicles) helps them compartmentalize different phases in a single project or to float a project as an independent entity. It allows them to tap foreign and local funds. PE funding is available at entity level and in this way promoters do not need to dilute their stake in the parent company
3. Removes stamp duty :
   
   From the accounting perspective, having subsidiaries helps companies avoid stamp duty on the sale of land. Once a subsidiary acquires land, any transfer of land thereafter involves a transfer of shares in the company hence avoiding stamp duty

Difficulties faced by having large number of subsidiaries

1. Under the Companies Act, firms have to make an application for incorporating the company. Thereafter, Registrar of Companies issues a certificate of incorporation. A company cannot start functioning unless it receives Certificate of Commencement of Business. With so many procedures to form a company, Baweja of Emaar said they usually register companies even before they begin acquiring land. Time taken to start a subsidiary is very high and involves large regulatory hurdles.
   
2. Once the company is operational, each entity has to have at least two directors, get its account audited and conduct one annual general meeting (AGM). With 200 or 400 subsidiaries, it might sound a logistical nightmare to have so many board meetings and AGMs in a given year.

But, it is not so. Companies say all they require is a good legal team. “Every subsidiary normally has two directors, so the AGMs are more of a routine process,” said Parekh. By law no individual can be a director in more than 20 companies. It helps if the promoter has a large extended family. In most cases, directorships are filled by employees or relatives.