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Companies Act 2013 likely to jolt realty firms in India

Steel News - Published on Tue, 22 Apr 2014

Business Standard reported that the recently-enacted Companies Act, 2013, is expected to give a jolt to real estate companies, already facing a severe fund crunch due to falling sales and high debt on books.

Section 185 of the Act, among other things, says a company cannot give loans to (or provide security on a loan taken by) a person in whom its director is interested.

According to the Act, “any person in whom a director is interested” could mean a director of a lending company or its holding firm, or a partner or relative of any such director, or a firm in which any such director or relative is a partner, or a private company of which any such director is a director or member.

Mr Sai Venkateshwaran, partner & head (accounting advisory services) at KPMG in India, said that promoter directors of several real estate companies could potentially be covered under this law, as many of them are directors of both parent and subsidiary companies.

Mr Venkateshwaran said that “It could become a liquidity issue for many realty companies. Earlier, funds raised by one company could be freely transferred to another group firm where there was need for liquidity. With the new rules, companies’ ability to balance liquidity needs across group entities gets restricted.”

Though the corporate affairs ministry has clarified that a company can lend to its fully-owned subsidiaries, Venkateshwaran doubts this will apply on realty firms. That’s because many real estate companies only partly own their subsidiaries project partners, including land owners, private equity contributors and other investors bringing in capital, too, are owners.

Mr Sunil Rohokale MD of ASK Investment Holdings suggests related-party transactions were earlier used as a way to siphon off funds, since developers floated different special-purpose vehicles for different companies.

Mr Rohokale said that “There used to be a free flow of funds from holding companies to subsidiaries. The changes in the Companies Act will ensure each project will be capitalised sufficiently and surplus cash will not be given to directors or taken out of a company.”

Mr JC Sharma, vice-chairman of realty company Sobha Developers, said that it might affect some developers in the short term but will bring strength to investors and buyers over a longer period.

Source – Business Standard


Posted By : admin on Tue, 22 Apr 2014
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