Govt's Rs 25,000-cr realty fund may see some 'structural challenges'

The special fund announced by the finance minister could face some challenges due to its structuring, said private equity fund managers and consultants Business Standard spoke to.

Srini Sriniwasan, managing director at Kotak Investment Advisors, said although the government has the right intentions, the devil is in the detail.

“The positive net-worth criteria are a non-starter. There is a risk of insolvency laws not recognising rescue-financing as senior debt in the waterfall. Further, unconventional interpretation by the court of law puts this fund at risk, too. Unless insolvency laws are amended, this will be a case of good money after bad,” Sriniwasan said.

In waterfall structures, senior debt providers get principal and interest first from borrowers, and subordinate lenders afterwards.

Said Sharad Mittal, executive director and chief executive at Motilal Oswal Real Estate: “When an investor comes in last-mile financing, he wants preference in waterfall… If that project goes to the National Company Law Tribunal, the investor does not get any preference. That is a challenge with this fund.”

A chief executive of PE fund who did not want to be quoted said it would take six to eight months to close the fund and start disbursing. 

“Since the new fund would give senior debt, it would get first charge. After one or two years, money the earlier lender gets would be lesser than the principal and he has to take a haircut,” said the executive.

Added Sunil Rohokale, chief executive and managing director at ASK Investment Managers: “The fund aims to hand over to projects to customers. It’s for other stakeholders, not for developers,” he said.

Kotak’s Srinivaswan added that most of the property projects are housed in special purpose vehicles (SPVs) and these SPVs tend to have very thin capital structures. “So it’s easy for them to lose their net worth. Therefore, I am not sure whether that condition is a concurrent condition applicable on all projects or it is just one-off...,” said Sriniwasan.

He said there has to be sufficient cash flow available between the sold and unsold inventory for this money to go in and get its desired returns, he added.

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