Unitech’s fate is a lesson for India’s reckless real estate companies

Unfinished dreams.
Unfinished dreams.
Image: Reuters/Amit Dave
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A decade ago, Unitech was India’s second-largest real estate company, a position it managed to hold on to till 2010. But plagued by delays in delivering projects, an inability to return money to fixed deposit holders and large corporations, botched expansion plans, and a number of controversies surrounding the promoters, the company lost the plot. 

On Dec. 08, the union corporate ministry moved the National Company Law Tribunal (NCLT) to take over the company’s management. In turn, the bankruptcy court allowed the government to appoint 10 nominees to the firm’s board.

Unsurprisingly, Unitech wasn’t happy about ceding control to the government, and challenged the NCLT order in the supreme court. On Dec. 12, the supreme court reprimanded the Narendra Modi government and bankruptcy court for initiating the takeover. “When we are hearing this matter how can NCLT pass orders. It is disturbing,” the court said, but asked the government to provide suggestions to help safeguard the interests of homebuyers.

There are several real estate companies in India that seem to be scripting different versions of Unitech’s story, almost all marred by severe project delays and loan defaults. And analysts suggest that Unitech’s current situation should serve as a lesson to other realty firms that they can’t take the system for granted. 

“This should set the tone that if they can’t get their act together, the government can step in,” said Pankaj Kapoor, managing director of Liases Foras, a real estate rating and research company. “It’s not only the creditors, depositors, and the buyers who are suffering. Because it’s a listed company, the shareholders’ money is also at stake. Therefore, this was necessary.”

Close to 40% of all residential and commercial real estate projects in India are delayed by between three and four years, a 2016 study by Assocham, an industry body, found. Other realty firms under the scanner include Supertech, Parsvnath Developers, and Jaypee Associates.

Slip and slide

At the end of the last decade, India witnessed a 300% growth in residential real estate prices, prompting companies to scale up land acquisition and launch new projects. But as the 2008 financial crisis hit, sales plummeted and prices declined. The market never really recovered. 

Unitech was a victim of this downturn.

The Gurugram-based firm was unable to raise money as planned, scuttling growth. A slowdown in sales and a growing list of unfinished projects followed, which in turn led to defaults and accumulated debt worth Rs6,733 crore ($1.04 billion).

In 2014, the Life Insurance Corporation (LIC) of India declared Unitech a wilful defaulter—a borrower who has the capability to repay but chooses not to—on its loan of Rs200 crore taken in 2007. The company was also pulled up by banks. Another real estate company, Tata Realty, dragged Unitech to the courts for the non-repayment of a loan of Rs1,700 crore.

Meanwhile, homebuyers are stranded: Unitech is reportedly yet to deliver 16,299 flats worth Rs7,816 crore, besides paying back corporate deposits worth Rs723 crore collected from 51,000 customers. 

Over the years, its shareholder wealth has also eroded. On Dec. 12, 2007, Unitech’s stock was valued at Rs486 on BSE; today it is around Rs8. In the July-September quarter this year, the company reported a net loss of Rs149.23 crore on a consolidated basis.

But it wasn’t just in realty that Unitech bungled up. The 2G wireless spectrum licence that it won in 2008 landed Unitech promoter Sanjay Chandra in jail in 2011 after the telecom scam erupted. He, along with his brother Ajay, were later arrested for money laundering and failing to deliver projects on time.

An email sent to Unitech remained unanswered.

“The downfall was led by a combination of various reasons—stressed balance sheet, project delays, failed diversification, etc. However, considering the situation that the firm was in, the government takeover is a positive move,” said Neeraj Sharma, director, Grant Thornton, an audit and consultancy firm. 

The possibility of a Unitech takeover comes almost a decade after the government took control of Satyam Computer Services to sort out the Rs7,000 crore accounting scam perpetrated by its founders. Once in charge, it typically constitutes a new board that puts in place steps to get the business back on track. Once the major existing issues are ironed out, Sharma added, the board can either let another firm take over or bring in additional investors, or do a combination of both.