A report by BNP Paribas Securities India Pvt. Ltd on corporate governance at eight leading Indian real estate companies found that each of them performed poorly on one or more of the parameters considered for the assessment.
Compensation structure, ability to retain key personnel, financial stability, pending litigation and trading in own stock were some of the criteria used to assess the management quality of Oberoi Realty Ltd, DLF Ltd, Unitech Ltd, Sobha Developers Ltd, Mahindra Lifespace Developers Ltd, Godrej Properties Ltd, Prestige Estates Projects Ltd and Phoenix Mills Ltd.
DLF and Unitech lagged behind on many of the parameters including stability of company financials and outstanding litigation, said the report. Oberoi Realty, Mahindra LifeSpaces and Godrej Properties performed poorly on compensation paid to management, trading in own stock and financial stability, respectively.
India’s real estate sector has often faced criticism for poor corporate governance standards and lack of transparency.
“No real estate company completely follows the required practices of corporate governance,” a Mumbai-based analyst privy to the BNP Paribas report said on condition of anonymity. “The assessment made in the report is just relative as there is no company better than the other as far as corporate governance is concerned.”
Oberoi Realty’s management emerged as one of the lowest-paid leadership teams—the total compensation on average for the last three years was 0.5% of net profit, the report said. Sobha Developers had one of the highest pay-outs at almost 6% of net profit compared with the industry average of 2.8%. Godrej Properties and Prestige Estates were also above the industry average.
Sobha Developers and Phoenix Mills stood out for the turnover of key personnel. Phoenix changed the composition of its board of directors eight times and Sobha changed its chief financial officer three times in the last five years.
“A high turnover in management impacts efficiency,” said the report. “More so, it raises concerns over the stability of the organization.”
The promoters of DLF and Mahindra Lifespaces were the most active traders in the stock of their own companies, with 13 and eight transactions, respectively, over the last three years.
“We do not think that trading in company stock by promoters or key management personnel is negative or reflects poorly on corporate governance,” the report said. “However, it cannot be ignored and if frequent it also implies promoters are focusing on the stock price rather than the core business.”
Based on financials like the earnings before interest, tax, depreciation and amortisation (Ebitda) margin and profit margin, Sobha Developers, Oberoi Realty and Mahindra Lifespaces emerged as the most stable companies, and DLF and Unitech performed the worst.
The report also said most of the real estate companies are exposed to so-called key man risk—the impact caused by the loss of a key executive—and pending litigation/allegations are seen as contingent liability, implying a red flag against the management.
Sobha Developers had the lowest number of outstanding litigations against it (4) and DLF the highest at 128. However, the report gave Unitech the lowest ranking on litigation risk because of a subsidiary’s involvement in the high-profile 2G telecom spectrum case.
On other parameters, which include high disclosure levels, non-core diversifications, accounting policy and history of promoter-related transactions, Oberoi Realty, Sobha Developers and Mahindra Lifespaces had high rankings, while DLF, Unitech and Godrej Properties performed below average.
Godrej Properties declined to comment. With the exception of Sobha Developers, the other companies didn’t respond to emails sent by Mint seeking comment on the report.
“With reference to the ratings (by BNP Paribas), we do not know how they have been derived. In fact, with respect to different parameters mentioned for corporate governance we follow the best practices,” said Sobha Developers. “Our financial statement also shows the same.”
http://www.livemint.com/Companies/bvjMILYWvHjbpVWD9QexhN/Real-estate-firms-score-poorly-in-corporate-governance-stud.html
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