New trend and technique to attract investors into Real Estate is by offering assured return for construction period, guarantee for lease after construction and many lucrative offers. Many investors are investing blankly by believing the offer and most of them are not verifying the financial strength of the builder.
One of our clients has received such an offer and was brainwashed to invest in that project. He asked us to just check the financials of the company. The offer was like this:
Our client was very interested to invest in the project. But I was confused with one point. The construction will be completed after 5 years and the builder can earn profit after this period. From where the builder give 12% assured return from the beginning? I decided to personally visit the office of builder and property dealer.
When we tried to take appointment with the marketing head of builder, he became nervous and refused to meet us and advised to meet the property dealer. I have visited the office of property dealer.
He has explained everything like a parrot. He said the builder have every kind of approvals and licenses, it is displayed in the office. There is more than 10.75 acres of land which will be used for constructing commercial complex, work is already started etc. He tried to show me some licenses from the government website and failed to do so. But I have seen a license issued by the government for another company for the same plot which was for other purpose. This license was also expired two years back. In my presence two other persons came to invest in that project and impressed with the explanation given by the dealer.
I insisted the property dealer to fix an appointment with the marketing head of the builder. The property dealer contacted the marketing head and when he was convinced that my queries are over, he agreed to meet us.
When we meet the market head, he was little nervous but was explaining about the 150 crore business he did after the enquiry started by our client, and was blaming our client for unnecessary delay in taking decisions. He said he won't spend more time for small investments like few Crore Rupees. I got suspicious and decided to go through the financials of the company.
Horrible Financial Statement of the company
First surprising thing at the time of inspection of Financial Statements of the company was the group companies were not filing Balance sheet and ROC return for the last few years, which is to hide the actual financial position of the company. As per the available records the company is running in huge loss and giving assured return to the investors from the amount collected from them. The company has current assets worth few crores and the current liability I many times more than that of current assets.
Expired Licenses
While inspecting the record it was found that the license issued to the company was for some other purpose and had already expired.
Paper Company with Rs. 1 lac share capital is offering to construct building with multi crore project cost and not the real owner of land
It was found that the company offering to sell the project was registered before few months and its paid up capital is Rs. 1 lac only. They are offering to complete project costing more than Rs. 100 crore. The proposed land for construction of the building was owned by another group company and also was mortgaged for some other purpose.
Many Group companies to rotate funds
Inspection of the records also revealed that there are many group companies running in the same filed with minimum capital and the directors are same.
What will be the result if we invest in such Projects?
The company will give assured return till the time they have sufficient inflow of funds from new investors. When the inflow stops they will not be able to give assured return to the investors.
What will be the fate of proposed project?
The project will definitely not work. The builder have long period of time for construction. They will manage this period by explaining one reason or another of doing some work. A project without proper licenses and approvals will never complete.
What will be the situation after failure of the Project?
After failure of the project few of the investors will go for litigation. Others will wait. The builder will simply face litigation by using investor's fund. Because, it will take many years to get final judgment of a case the builder can easily enjoy that period.
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