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Monday, July 29, 2013

Mumbai slum development project hangs in the balance
~~Khushboo Narayan Mail Me |  Madhurima Nandy Mail Me |  Unnikrishnan S.
The High Court Verdict Very Soon...........
Mumbai/Bangalore: In October 2007, when Housing Development and Infrastructure Ltd (HDIL) won a contract to rehabilitate slumdwellers encroaching on Mumbai airport land, the project held out the promise of a bonanza for the real estate company and its investors.

The country’s largest slum redevelopment and rehabilitation project, it entailed building new tenements for 85,000 families and relocating them, freeing up 276 acres for Mumbai International Airport Pvt. Ltd (MIAL) to build a new terminal and other facilities and expand the runway.
 
After HDIL won the contract, brokerages forecast yearly revenue growth in excess of 50% for the company over the next three years and assigned fat valuations to its stock.
 
Less than six years later, work on the rehabilitation project has come to a halt after MIAL, whose airport expansion plans have been delayed, scrapped HDIL’s contract and sought Rs.276.46 crore in damages.
 
The property developer has in turn taken the airport operator, in which Hyderabad-based GVK Group has a majority stake, to court after writing off Rs.440 crore against the cost of the project in the three months to 31 March and reporting its first quarterly loss.
 
A ruling by the Bombay high court is expected this week, perhaps as early as on Monday, in a case that illustrates how large-scale infrastructure and resettlement projects are held hostage to commercial disputes, buck-passing and red tape, as revealed by court submissions by companies and agencies involved in the dispute.
 
HDIL declined to comment for this story. “As the matter is before the honourable Mumbai high court, it is difficult for the company to address your queries or offer any clarifications on a sub-judice case,” an HDIL spokesperson said in an emailed reply to a detailed questionnaire.
The beginning:
 
After Mial won the contract to develop and modernise Chhatrapati Shivaji International Airport in December 2006, it faced a problem peculiar to Mumbai: having to construct new facilities and enhance an airport in the middle of the city, with a big portion of Airports Authority of India-owned land encroached on by slums.
 
Subsequently, MIAL entered an agreement with the Mumbai Metropolitan Region Development Authority (MMRDA) for rehabilitation of the slumdwellers. The government body was supposed to assist MIAL in freeing up the land and finding a subcontractor or developer for the rehabilitation scheme.
 
Later, MIAL decided to award the contract to HDIL, which had cut its teeth on slum rehabilitation projects in the city. By January 2008, HDIL had completed about 2.3 million sq. ft of such projects, according to a report by Motilal Oswal Securities Ltd released at that time. Having completed its initial share sale in June 2007, HDIL was keen to establish itself as an entity to reckon with in the realty firmament.
 
Under the contract, HDIL had to relocate the 85,000 families within four years, after which it would receive 65 acres for commercial development, apart from so-called transfer of development rights (TDRs), according to court submissions.
 
That was a time when slum redevelopment and rehabilitation projects were proving to be financially viable with galloping property prices, allowing developers to earn healthy margins.
 
According to the Union government’s slum census of 2011, about 41.3% of all households in the Greater Mumbai area are slum households. That is higher than the average of 38.1% in 46 cities across India with a population of at least one million people.
 
Slum redevelopment is potentially lucrative, but it has its share of disrepute.
 
“Developers rig the bidding for slum redevelopment projects. Then they create records for bogus tenants so that they can manipulate the FSI (floor space index). This segment is rife with corruption,” said lawyer Vinod Sampath about slum development projects in general. He wasn’t talking about HDIL in particular.
 
In the first phase, HDIL was to develop 157.93 acres by 14 October, 2009. In the second phase, it had to develop 118.53 acre by 14 October 2010, according to court filings by MIAL. In its court submissions, MIAL says HDIL had to build 28,000 tenements by October 2010.
The dispute:
 
According to court submissions by HDIL, 7,012 tenements have been completed until now, of which 6,315 are vacant as the government dithers on eligibility norms for handing over their possession to slumdwellers. Some 17,605 flats are at least 80% complete, it said.
 
The numbers are far less than figures cited by the company in the past. According to its 2009-10 annual report: “First 15,000 tenements are scheduled to be shifted in less than three months. Approximately 25,000 apartments have been constructed to avail the shifting of the slumdwellers.”
 
On 24 June 2011, MIAL sent a notice of default to HDIL, which went unanswered, according to court submissions. MIAL sent another notice on 30 January 2013 to HDIL, asking the developer to pay damages of Rs.276.46 crore within 15 days.
 
In February, HDIL replied to the notice that it was unable to shift the slumdwellers even to the 7,000-odd tenements that were ready on account of delays by the government in finalizing the eligibility criteria for handing over possession, said the MIAL filings.
 
HDIL also said in its reply that it had written to the Prime Minister and aviation ministry, requesting them to look into the matter. But MIAL was not to be mollified and, on 6 February, it served a notice to HDIL terminating the contract, directing the developer to remove its employees and equipment from the project area.
 
HDIL, which had already invested Rs.4,000 crore in the slum project, challenged the termination of the contract in the Bombay high court on 26 June after MIAL declined an arbitration offer, saying it would be a “futile exercise” as HDIL had committed a “self-confessed repudiatory breach”.
Deflecting blame:
 
HDIL’s defence for failing to meet targets is predicated on the force majeure clause—essentially a statement that the delays were beyond its control. It placed the blame on the Maharashtra state government and its agencies. In a reply to one of MIAL’s notices, the company said: “Unless the government decides the eligibility criteria for rehabilitation, we are not in a position to execute the project due to circumstances beyond our control.”
 
In particular, it named MMRDA. “MMRDA did not perform its duties of carrying out a survey of the airport slum, preparing an action plan for rehabilitation and identification of eligible slumdwellers on time,” Raju Subramaniam, a lawyer representing HDIL argued in court.
 
However, in its 2011-12 annual report, the company had said: “MMRDA has started the process of shifting of eligible slumdwellers from Mumbai International Airport slums to Kurla Premiere compound and has issued allotment letters to the eligible slumdwellers for the first phase.” This could possibly refer to the 700-odd families that have been relocated.
 
Then again, MMRDA has seemingly washed its hands of the slum rehabilitation project. Its counsel, Kiran Bagalia, argued in the court that, despite being the nodal agency for the airport slum project, MMRDA had never been consulted. Moreover, it had never consented to the appointment of HDIL and cannot be accused of non-performance.
 
MMRDA is not the only state actor in the dispute. There is also the Slum Rehabilitation Authority (SRA), set up in 1995 to police the resettlement of slumdwellers and ensure that they are not fleeced by unscrupulous realtors.
Spanner in the works:
 
In 2007, after winning the contract from MIAL, HDIL entered another agreement with SRA, as required by law. According to SRA’s lawyer, this contract was for “building houses to rehabilitate slumdwellers affected by projects of public importance”.
 
SRA said HDIL had independently approached the agency with seven plots spread across the city for development under a regulations prescribing the norms for rehabilitation of slumdwellers through owners, developers and cooperative housing societies.
 
Under the terms for the rehabilitation project given to HDIL, the company is supposed to build 18,794 rehab tenements along with a child care centre and a common area for slumdwellers. In return, HDIL would receive certain transfer of development rights and 25% sale component of the total tenements constructed by it, said SRA’s lawyer in the court.
 
HDIL then handed over some parcels of lands it held to SRA and started construction of the tenements.
A spanner in the works was SRA’s contention that this agreement is independent of HDIL’s contract with MIAL. The agency is demanding that it be given possession of the tenements being constructed by the firm.
SRA has already released some development rights to HDIL which the latter sold in the market for Rs.2,400 crore. Therefore, SRA says, the firm is bound to complete the project as per the agreement and cannot stop the work.
 
In its submissions to the high court, SRA has alleged that HDIL had refused to give possession of the tenements that have been already built. The company said it will not hand over the buildings to SRA as the airport slum project agreement between the company and MIAL had been terminated.
Financial impact:
 
The Mumbai airport slum rehabilitation project is vital for HDIL, making up 35.8% of its ongoing projects, according to a presentation on its website.
 
Like many other developers, it was hurt by fallout from the 2008 global financial crisis and its aftermath, leading to delays in project execution and a cash squeeze, and the domestic economic downturn that took hold last year.
 
In the financial year ended 31 March, HDIL’s consolidated revenue was Rs.1,025.2 crore, less than half the revenue it earned in the previous year and 57% lower than reported revenue for 2007-08, its first year as a listed firm. Its profit of Rs.73.33 crore, after the write-off towards the cost of the Mumbai airport slum project, was the lowest in six years.
 
HDIL’s share price has shed 90% of its value since listing, compared with an 83% drop for the BSE Realty index. The fall was exacerbated by a rating downgrade after the company came to the brink of defaulting on a non-convertible debt issue.
 
The company’s “focus is very clearly on debt reduction and on launching projects”, Hari Prakash Pandey, HDIL’s vice-president, finance and investor relations, said on 18 July.
HDIL’s consolidated net debt as of 31 March was Rs.3,821.53 crore, about Rs.120 crore less than in December.
 
Its net debt-equity ratio of 0.36 is reasonable, but generation of free cash flow needs to increase significantly, analysts Saurabh Kumar and Gunjan Prithyani of JPMorgan wrote in a 29 May report.

“This will be contingent upon converting old receivables (Rs.700 crore, launch of new projects (3-5 million sq. ft target) and some asset sales,” Kumar and Prithyani wrote.
 
But how the ruling in its case against MIAL goes could be key for a company that built its reputation on its success in slum redevelopment projects, only to flounder when it got the chance to handle the biggest of them all.

khushboo.n@livemint.com

Courtesy: Live Mint