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January 24, 2006

Real Estate PE Firms willing to wink at black money?

While both foreign and domestic Private Equity firms are rushing to launch Real Estate funds, observers have predicted that PE investors will face serious challenges in dealing with corporate governance related issues in this industry. A recent Businessworld column suggests that PE firms are willing to make compromises and live with workarounds.
Builders may be nonchalant about walking around with suitcases bulging with unaccounted-for cash, but it might not be easy for say, an American private equity investor, unfamiliar with the Indian black economy, to do this. If a recent meeting between a foreign private equity player and a builder in Mumbai recently was any indication, the investors are planning to look the other way.

The way it will work is this: the builder is the one who does the dirty work of buying the land and handing over bags of cash. He will set up a company which will actually own the land. Shares in the company will be sold to the foreign investor at a premium. This premium, as the builder put it delicately, 'will... er..., reflect the costs of doing business'. Problem solved it would seem. Except that the investor was left wondering (in a whispered aside to his tax adviser also present at the meeting) whether the premium actually reflected the cost of the property. The adviser's response was completely honest: "How on earth should I know?" he whispered back.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.