News: ‘Sight’, ‘blind’ funds take AIM

(DNA 05/12/2006) Mumbai - Call it herd mentality, but Indian real estate developers are going in hoards to the Alternative Investment Market (AIM) of the London Stock Exchange.

Why are they looking West, when funds can be mopped up in the local market?

There are two reasons: valuations, and institutional interest in the Indian realty space.

“The real estate and infrastructure space is relatively new in India. Though real estate companies have been successfully raising funds in the domestic market, they are getting better valuations on AIM, where the sector is better understood and where institutional investors are keenly watching the Indian realty story play out,” said Ambar Maheshwari, director, investment advisory, DTZ India.

All companies looking at international funding need to have foreign direct investment (FDI)-compliant projects.

This means that each property needs to have a built-up area of over 50,000 square metres, and the project should necessarily have a development component.

Some developers have been clubbing together 4-5 projects under the fund being raised (on AIM), but each needs to be FDI-compliant individually.

Some of the benefits that a real estate company enjoys when getting listed on AIM: “The parent company does not get exposed at all because it is an entirely new company that is raising the fund, the parent company can continue with its non-FDI projects, and there is no dilution of stake in the parent company,” said Josef A Pattathu, executive director of Housing Development and Improvement (India) Ltd.

The fund being raised is divided into two parts: ‘sight funds’ and ‘blind funds’.

The former is the value attached to properties that have already been identified for development, while the latter is the value that investors give to properties yet to be identified by the developer.

“Blind funds are normally 30-40% over the sight funds, going up to 60% sometimes, depending on the trust investors repose in a particular developer,” said Pattathu. Among firms that have already raised funds for India through AIM are New-York based Trikona Capital (around $450 million through its fund Trinity Capital) and CL Raheja-promoted Ishaan Real Estate ($341 million).

Waiting in the wings to raise money on this exchange, are Unitech ($700 million) and Niranjan Hiranandani’s daughter, Priya, who is structuring a $700 million fund. Besides, Westfield Pioneer is said to be raising a $50 million real estate fund on AIM.

Another benefit of AIM listing is that none of the new companies (funds) being formed need to be incorporated in the UK. They can route their investments through vehicles incorporated in principalities such as Cayman Islands, Isle of Man or even Mauritius, with which India has a double taxation avoidance agreement.Why is AIM better than other international markets?

“From the regulatory standpoint, AIM is very flexible. It does not stipulate minimum requirements with regard to company size, track record, the number of shares in public hands and market capitalization.

This makes cost of compliance low as compared to other exchanges,” said Vineet Suchanti, managing director of Keynote, a domestic investment banking firm.

“Further, the entire responsibility of due diligence and documentation is on the nominated adviser, who is accountable to the investors,” he added.

Both UK and overseas companies joining AIM are required to pay a flat fee of £4,340, which is not a tall order in the light of the other aspects, said Suchanti. Though no admission fee is payable by AIM companies for further issues, an annual fee of £4,340 is payable by all AIM companies.

Noida Toll Bride and Great Eastern Energy Corporation are a couple of non-real estate Indian companies listed on AIM. According to the AIM website, since its launch in 1995, over 2,500 companies have joined it, raising more than £34bn both through initial public offerings (IPOs) and further capital raisings. It is a market specifically designed for getting smaller growth companies listed. It becoming an exchange-regulated market in October 2004 has further added to its lustre.