Recently, some of the Indian real estate developer companies lost more than 80% of their valuations. In some instances, their share prices fell below the offer price.

Hi. Let me share the due credits before you read forward. This post on my blog comes through with the active support and contribution from my colleague Ruchika Bhardwaj. She had apparently asked the question listed above to a group of experts, primarily on the networking site – Linkedin. Most of the below mentioned answers are from the respondents, and not solely mine. The reason I am carrying this on y personal blog site is to enlarge the debate, and solicit more & more readers to respond, so that we can collectively brace ourselves against some intentional, and many erroneous decisions, wherein the investor becomes the loser in the end.

Due credits are given wherever possible to the contributors. If someone wants his name to be removed from the quote, please drop me a line on

Here is how everyone responded.

REPLY BY RAMESH MENON, Founding Partner, CERTES Realty Ltd.


Nice question.


In my opinion, most investors in the primary markets subscribed to the shares of these developers, on being coerced on certain valuations, and growth numbers. Most opined, probably that the India real estate growth story would continue, and that the management of these companies would deliver results.


Three issues were not considered by many.


1. The correct valuation

2. The funding for development

3. The management expertise & competence.


If the above have to be considered, then the question is – “WHO DID THE VALUATION OF THESE COMPANIES, AND THEIR ASSETS?” How can an assessing company make such a misguided valuation of the assets? (Most cases, the assets were overvalued). Deliberate? or lack of in-depth knowledge about the sectoral nuances? – I must say this ‘tongue in cheek’ – Pedigree irrespective.


Most of those companies referred by you have land holdings – but the lack of funds disallows them to convert it into a project. Hence, the land valuations are assumed to be much lower, than projected.


Thirdly, the talent pool is miniscule compared to the size of the investment projections. There is hardly any specialization in the companies referred by you. The same developers end up launching projects in all segments – SEZ, residential, Mall space, Townships, infrastructure, economy & al.


I tend to agree somewhat that some of the misfortunes of the small investor could easily have been avoided… had they been shown the correct picture. Much was concealed from them.


Sign off time now – It would take much more than the current abilities of these developers to bounce back… and deliver value.


Answer by Mr. Andrew Paddon– A director with an Australian Co. Specializing in M&A, PE, VC


Short answer- the government.


Some developers have had properties valued by their own valuers, have few developments in their portfolios and have not disclosed the nature of mezzanine debt to their investors.


In response the government must make property development and investing more transparent. In Australia it has sought to do this by establishing benchmarks and minimum disclosure requirements.


See ASIC RG170 which is the standards an Australian company must meet before publishing a return forecast. Also see ASIC RG69 which sets benchmarks for debt-based investment in property schemes.


In the absence of these requirements a developer could have a “good-faith” basis for making propsective statements about the returns, and if it is not illegal for them to: Use their in-house valuers; 1 valuer for all their properties; and; mark to a hypothetical market their property valuations; then it is not their fault for doing so, when doing so is cheaper and more effective for them.


Essentially there are two forms of corporations / securities law: MERIT BASED – the old english system where you had to petition the King for a license to incorporate a company and raise money- and that license would only be issued if the King’s advisors thought the company had legs.


The other is DISCLOSURE BASED – which is what most of the world’s CA is based on. You can sell dog investments, so long as you tell everyone about the fleas.


Given that the governments knowingly allow investments with little chance of success to get up, it falls on them to ensure that the risks of investing are properly disclosed to investors – c.f. in Australia the “Clear Concise and Effective” prospectus requirements.


The idea is that the authors of a prospectus have criminal and civil liability for false and misleading statements. This is meant to be sufficient inducement for proper disclosure. However quite a number of the authors of prospectuses do not have the skills to identify the risks of their own businesses….


So the question for you would be how much protection does the Indian government give to retail investors?


Contribution from Elaine Coffee, from Australia

Few in the industry had the foresight to see that real estate was about to implode. There was no criminal intent in the investments being sold to people as bundled, low-risk, investment vehicles, that were generally part of a package of other investment vehicles. Everyone assumed real estate to be inviolable, because it had been steadily climbing for 20 years. Many of the brokers had probably never experienced a decline in real estate prices, and assumed it couldn’t happen. The calamity of events conspiring to bring the market down, starting with tremulously low interest rates in the late ’90’s and early millennium, coupled with the declaration of an unnecessary oil war, by George Bush in 2003, followed by a subsequent surge in interest rates to cover the costs of that war, and then subsequently to prop up the dollar, when it was no longer resting on the strength of our reserves, caused the cascading failure of VAR mortgages that were written prior to that war, and brought our banking system to its knees, as the government tried to both cover its tracks, and ascertain a way to keep the dollar high during the current administration. That brought on the credit crisis, which has precipitated the current mess in real estate, that is likely to extend for some time.

Which of those events would you blame your broker for not having recognized in advance?

No one is really to “blame” here. Stuff just happens. If it was not this that caused the cyclical downturn in the system, it would have been something else. No one is operating with a crystal ball. And the more you make yourself responsible for your own investments (just like being a good, and educated patient) the safer you are from mistakes, and the happier you will be.

Contribution from a business editor of Deccan Chronicle

Small (or large) investors are responsible for the losses incurred in the stock market. Most of the real estate IPOs, which started out in late 2006, were running on optimistic valuations of ‘land-banks’. In many cases, these land-banks had been valued by consultants appointed by the developer – a very obvious conflict of interest. However, nobody bothered too much in a rising market. Now obviously, things have changed.

Moreover, prospects for the real estate industry have worsened because of rising interest rates – from a low of 6-7% three years back to over 10% now. You also need to consider that valuations don’t remain unchanged – they react to changes. Changes in interest rates, changes in raw material prices and changes in growth rates.

My sympathies to whoever has lost in the market, but then, equities are inherently risky. You can’t expect a higher return yet expect no or low risk.

Contribution from Atul Mehta, a business engineering expert

Real Estate market is consisted of two kind of assets as under:


  • Stacey Derbinshire

    I’ve been reading along for a while now. I just wanted to drop you a comment to say keep up the good work.

  • Facing the reality of the circumstances over the last few years, the small investor has let himself down and is now looking for a scape goat to blame all his losses and anguish on.
    The usual targets would be the corporate itself, the government, economic policies or its delay, incorrect advise received, amongst others.
    In the question you have chosen to indicate blame on the corporate; however, you may realize that they are only one part of a very large picture in an even larger dynamic scenario. Further, there are no guardian angles around and no free lunch tickets in the stock markets.
    Caution is advised at all times.
    Happy investing,

  • What makes you think that only small investors got duped?
    I know cases where big shot PE firms have made losses in excess of 50%.
    Sticking to the question at hand,
    You cannot have everybody making money in the markets…. then you wont have a market.
    Its like a eco system… you need the bulls, the bears and the sheep.
    Warm regards
    Neil Bahal

  • This is a very interesting mail sent by Mr. Adam Petty, against this very question raised in a different forum. I enjoyed reading it.
    Once upon a time, a young lad was born without a belly button. In its place, was a silver screw. All the doctors told his mother that there was nothing they could do. Like it or not, he was stuck with it….. he was screwed.
    All the years of growing up was real tough on him, as all who saw the screw made fun of him. He avoided ever leaving his house…. and thus, never made any friends.
    One day, a mysterious stranger saw his belly and told him of a swami in Tibet who could get rid of the screw for him. He was thrilled. The next day, he took all of his life’s savings and bought a ticket to Nepal.
    After several days of climbing up steep cliffs, he came upon a giant monastery. The swami knew exactly why he had come. The screwy guy was told to sleep in the highest tower of the monastery…. and the following day when he awoke, the screw would have been removed.
    The man immediately went to the room and fell asleep. During the night while he slept, a purple fog floated in an open window, bearing in its mist, a solid silver screwdriver. In just moments, the screwdriver removed the screw and disappeared out the window.
    The next morning when the man awoke, he saw the silver screw laying on the pillow next to him. Reaching down, he felt his navel, and there was no screw there!
    Jubilant, he leaped out of bed…… and his butt fell off.
    The moral to this story is:’Don’t screw around with things you don’t understand…….. you could lose your behind.’

  • 1)The small investors were never duped.
    2)Organized Financial like regulatory authorities approve these big promises (when the issue approaches the markets).
    3)People have a choice and they choose the real estate companies.
    The point is either no one dupes or everybody dupes. There is never a free meal. This is a dog eat dog world and if you are not cautious , you are the only one responsible for the consequences. If you don’t have enough knowledge, finance and sustainability don’t play with fire.

  • Jonathan Warkentien

    The small investors are to blame.
    It’s just that simple. If you succumb to greed, if you don’t do your homework, if you fall for the same old bull recycled and repackaged, you’ve only yourself to blame.
    Remember what “Canada” Bill Jones said: “It is morally wrong to allow a sucker to keep his money.

  • Booming markets invariably bring with it unsavory people, who try to make some quick money through dubious methods. This is more or less the state of India’s property market at this point of time. There are developers who sell the same piece of land to number of customers and there are those who sell land without clear titles or mandatory permissions from the authorities.
    There are many fly-by-night operators and others in the unorganized sector who indulges in such fraud. So what should a buyer do? I would suggest buyers to investigate the background of any developer thoroughly. Believe me, if you are not careful, your life’s savings could be at risk.For more view-

  • Brian Borakowski Phoenix, Arizona

    The investor is responsible. Learn to read a chart and support lines. Enron, MCI all had great numbers while skidding off the ticker. There is a lot more to a stock than the numbers put out

  • Susan Shwartz PhD, USA

    Anything too good to be true almost certainly is.
    Ethically speaking, however, with India’s markets growing as fast as they’ve been doing, I think you need a program of financial literacy for individual investors. They’re not -prey-.
    I have a strong belief in fiduciary responsibility. If investors are investing with a brokerage firm of which you happen to be part, or if their accounts are in your bank, they ought to have some system of redress and should be discouraged from making investments for which they lack the capital, the sophistication, or the risk tolerance.

  • Ronald Garner, USA

    Whenever “new math” is invented to support outrageous assumptions for any market of investors, and is promoted as replacing the tried and true formulae, there lays the cause of the bubble.
    To answer your question, to whatever extent the research firms, banks, brokerages, industry promoters, and or media went to create confidence in unproven data measures the extent of there role in, as you put it, “duping the small investors
    Similarly, industry regulators, absent in questioning the “new math,” share blame for not being suspicious and requiring these new experts use more caution.
    The investors themselves should learn to be leery of “new math”. Trust people who have regularly made money in the market for advice. When they are concerned, ask why.

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