The ups and downs in the DB Realty story

Shahid Balwa and Vinod Goenka, the promoters of DB Realty, have a common background -- both are college drop-outs and came from families that, directly or indirectly, dealt in real estate.

While Balwa came from a family that has been developing hotels, Goenka's family developed residential buildings under the 'Conwood' brand.

Goenka independently launched his realty business under Dynamix brand. The two collaborated, in a 50:50 partnership, to developed a hotel in Mumbai, which is Hotel Le Meridian now. This led to the forming of the Dynamix Balwa group.

It was during the 2006-07 realty boom that the two did an image makeover with the help of Ogilvy and Mather and got a more savvy name -- DB group -- to get investors on board.

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After that, Balwa and Goenka did not look back until recently. Flagship company DB Realty's Rs 1,500-crore (Rs 15 billion) initial public offer in February 2010 was oversubscribed 2.95 times, despite poor response from retail investors.

Even during 2009-10, when most developers struggled, DB Realty posted a 77 per cent increase in net profit and over two-fold growth in sales.

With the IPO, Balwa and Goenka entered India's rich club. In the Forbes India's Richest List released last year, Vinod Goenka was ranked 54th, with a net worth of $ 1.18 billion, and Shahid Balwa was 66th, with a net worth of $1.06 billion.

DB's promoters also diversified into the telecom sector and bagged 2G licences, for Rs 1,537 crore (Rs billion), to operate in 15 circles. Later, they sold 45 per cent stake in telecom venture Swan Telecom to UAE-based Etisalat for nearly Rs 4,200 crore (Rs 42 billion).

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The company was renamed Etisalat DB.in 2009-10, when other realtors were struggling, DB Realty posted good numbers.

For 2009-10, its revenue doubled to Rs 951 crore (Rs 9.51 billion) from the previous year's Rs 464 crore (Rs 4.64 billion), while the company's net profit swelled to Rs 252 crore (Rs 2.52 billion) from Rs 142 crore (Rs 1.42 billion) a year earlier.

In the third quarter of 2010-11, the company posted a 71 per cent jump in net profit and 51 per cent increase in net sales, compared to the period the previous year.

DB Realty had a total debt of Rs 387.72 crore (Rs 3.877 billion) and a debt-equity ratio of 0.12 as of December 31, 2010, which the company called 'negligible'.

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The group claims it has delivered 15 million sq ft of residential, commercial and hotel projects and 61 million sq ft of projects under development.

What has raised eyebrows is the group's upcoming Hotel India Tower in Marine Lines area of Mumbai, which will be 720 metres high, making it one of the tallest properties in the country. Park Hyatt will manage the hotel.

However, the group's quick rise to success came at a cost. DB's name first cropped up in the 2G spectrum allocation scam, where the Comptroller and Auditor General said the Department of Telecommunications, under former communications minister A Raja, flouted norms to allocate 2G licences to companies like Swan Telecom (now Etisalat DB) and Unitech Wireless.

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The CAG blamed A Raja for causing a loss of Rs 1.76 lakh crore (Rs 1.76 trillion) to the exchequer by allocating 2G licences to new players at throwaway prices.

The CAG report also said Swan had given false certificates and its application did not conform with requirements for UASL (Unified Access Service Licence).

The report also said that Reliance Telecom, which was operating in all circles where Swan got licences, had an equity stake of 10.71 per cent in the latter at the time of licence application.

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This flouted the norm that a telecom company must have less than 10 per cent stake in another. However, Reliance Telecom has denied these charges.

CAG said Swan was also given spectrum in Panjab circle, even as it was fourth in the priority list. The promoters later sold 45 per cent stake in Swan for Rs 4,200 crore (Rs 42 billion) while the company had acquired licences for Rs 1,537 crore (Rs 15.37 billion).

In an email interview with Business Standard earlier, DB's Balwa had denied that DB Realty had any direct or indirect shareholding in Etisalat DB.

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"The promoters and Etisalat DB have shared all data/information and documents relating to the grant of licences with the government agencies and are fully cooperating with them. The promoters have maintained that licences were awarded to Etisalat DB after the necessary verification and due diligence by the government and, thus, we do not see any issue from our perspective," Balwa had said.

DB's name again came up recently, when investigating agencies were reported to be probing the Rs 214-crore (Rs 2.14 billion) loan given by Dynamix Realty, a subsidiary of DB Realty, to Kalaignar TV, which had Tamil Nadu Chief Minister M Karunanidhi's wife M K Dayalu and daughter Kanimozhi as major investors, in a three-step deal.

The reports said that Dynamix Realty, a firm owned 99 per cent by DB Realty, transferred Rs 209 crore (Rs 2.09 billion) in unsecured loans to Kusegaon Realty Pvt Ltd.

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Then, Kusegaon Realty invested Rs 206 crore (Rs 2.06 billion) in Cineyug Films. Finally, Cineyug gave Rs 214.8 crore (Rs 2.148 billion) as advances to Kalaignar TV in 2009-10.

Though DB Realty has denied giving any loans to KTV and having any association with Cineyug or KTV, the arrest of Shahid Balwa could spill the beans on the matter, analysts say.

DB's name was also mentioned in the bribe for loan scam last year, where the CBI arrested executives of Money Matters Financial Services and other commercial banks for paying and accepting bribes for getting loans for property developers. Money Matters helped DB Realty raise Rs 188 crore (Rs 1.88 billion) from LIC Housing Finance.

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After the arrest of Balwa on Tuesday night, DB Realty issued a statement saying: "These developments will not affect the functioning of DB Realty in any manner whatsoever. DB Realty will continue its business in the normal course under managing director Vinod Goenka, along with the top-tier team, under the guidance of the company's board."

Analysts are awaiting the outcome of the investigations. "It needs to be seen to what extent the allegations are true. When the whole sector is under the cloud, corporate governance issues with companies become very relevant," said an analyst with a Mumbai-based brokerage who did not want to be named.

Another analyst added: "It would be tough to say how it would affect the stock. If he (Balwa) comes out clean, over a period of time, the prospects may improve," he said.

With inputs from Katya Naidu.