SEBI proscribes futuristic valuation of land by realty firms

Mumbai: The Securities and Exchanges Board of India (Sebi) has asked real estate firms not to give futuristic valuation of land with them in their draft prospectus for public offers.

Sebi has asked all merchant bankers associated with real-estate IPOs to rework valuations and strengthen their disclosures on ''land banks'' in the draft red herring prospectus filed with the regulator.

Sebi is currently working out the modalities of the disclosures

"There should not be any disclosure of land values based on the future developed value of the land," Sebi said in a note on IPOs by real estate companies.

Seven real estate companies have filed offer documents with Sebi as of February 14. These issues are expected to raise around Rs17,400 crore from the market.

There is a tendency among real estate companies to ride a real estate boom to rise its huge fund needs from the market, the market regulator said.

"While on one hand, a string of issues by real estate companies reflects on the ability of Indian primary market to support such huge need for funds, on the other hand, it also perhaps reflects on a tendency on the part of issuers to ride on the real estate boom, thereby pointing to need for overall caution," the note said.

According to Sebi, disclosures by real estate companies show that there were no standards. At times, valuations include certain futuristic assumptions. While in some cases there are valuations, in some others there is no valuation.

There should be some standards for disclosures, the regulator said, adding that it was in this context, Sebi felt there is a need for a closer scrutiny of disclosures by such companies, especially relating to land bank and its valuation.

Among the seven prospective issuers, DLF has an IPO size of Rs12,000 crore, Omaxe Rs1,200 crore, Purvankara Projects Rs1,200 crore, IVR Prime Urban Developers Rs830 crore and Housing Development and Infrastructure Rs2,000 crore.

The Sebi move if strictly implemented could affect the prospects of many of these realty IPOs.