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.