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Strategy Story
 
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CORPORATE ETHICS: LAVASA
How Lavasa’s Rs. 470 billion Project is being Hit!

Issue Date - 03/02/2011
 
Lavasa’s township and its approach to real estate have been futuristic and widely appreciated, but its business conduct has faced key government and corporate admonishing. in an on-site visit, mona mehta documents the past timeline of a potentially debilitating issue that the company is facing – not from the MoEF, but from a group of investors who’re demanding their pound of flesh!

It made history when it developed the most ultra modern and futuristic hill city that India had ever seen. But who would’ve believed a few months back that the highbrow positioned über riche Lavasa Corporation would see its plans getting mauled like this. Firstly, it has had to contend with the ire of the Environment Ministry, which has said that no further construction should take place at the Lavasa site near Pune due to green violations bringing construction work on the site to halt. Top management personnel like Rajgopal Nogja, President, Lavasa Corporation, accept to B&E that this has had a major impact on Lavasa Corporation, not only financially but even on Lavasa’s goodwill. Till date, the stop-work order has had an impact over Rs.30 billion of Lavasa’s investment (the much touted Rs.470 billion figure is actually only the planned figure).

The stop-work order has also resulted in the company pushing back its plan to raise up to Rs.20 billion though the IPO. The daily loss caused due to the 8,000 strong work force and expensive machinery currently lying idle since November 26, 2010 runs into several millions. Estimates go that Lavasa Corporation is incurring a loss of Rs.20 million everyday. Total number of labourers reached 6,628 by December last year, whereas now the number has come down to 1,787; with the remaining leaving to join other contractors, and Lavasa personnel accept this is happening here and now.

But another critical – and perhaps out of the prime media limelight – is the potentially quite damaging legal spat with the MMV group and the revelations that are being brandished around. The chain of events was kicked off way back when Lavasa had initially planned to offer two plots available for setting up a five star hotel. In September 2009, they made a final selection of the plots. Subsequently, an individual Mudhit Gupta, Partner, MMV Group (owner of Velvet County Resorts and Hotels) and Managing Director, Emgee Corporation signed a term sheet with Lavasa at the latter’s office in November, 2009 along with his two other partners – his brother Mohit Gupta and Vinay Bhasin (co-owner of the Millenium Club at Juhu in Mumbai) for running a hotel cum club in Lavasa. Gupta tells B&E, “But Hindustan Construction Company (HCC) did not have a ready plot available for the club at that time.”

 
Still, once the deal was sealed, MMV apparently made a payment of Rs.1.1 million to Lavasa. This was for the purpose of construction of a 120 room five-star hotel at Lavasa. The overall project cost of JV between MMV Group and Lavasa was Rs.450 million in a 74:26 ratio. According to Nishith Dhruva, partner, M Dhruva & Partners (lawyers of MMV Group), “In this term sheet clause 19, Lavasa said that there was a court order in favour of Lavasa. Thereafter, Lavasa was to execute the lease in favour of MMV Group.”

MMV Group accepts that in July 2010 Lavasa did inform them appropriately about the fact that there still might be certain legal issues with the land, and that Lavasa could not execute the lease till the issues were resolved. Yet, in September 2010, in a draft red herring prospectus filed with SEBI, Lavasa did not bring out these issues or their critical nature. Soon after, MMV filed a legal case against Lavasa in November 2010. While the case is to be heard in the coming months, what is quite intriguing is the fact that now the law firm representing MMV group claims that there has existed a stay order on this land from the High Court which prevents Lavasa from selling that land, or dealing with the land.

While that may be simply an allegation of a law-firm intending to win its client quick money, the fact is that this, combined with the MoEF attack on Lavasa, throws up an extremely uneasy concoction. So what should Lavasa do? It’s very clear that Lavasa has not handled its image appropriately right from the word go. Added to it, the image that has been portrayed to the public by MoEF (and one is quite surprised at the MoEF’s post-haste waking up) has been nothing short of a mauling for Lavasa. Yes, Lavasa has been fire-fighting and attempting to resolve these issues (On the MoEF issues, Ajit Gulabchand, Chairman, Lavasa Corporation, met up with B&E and commented, “When we started the Lavasa project, we took environment clearance from the Government of Maharashtra. The Hill Station Act and policy of the Government of Maharashtra actually lays down environment norms to be implemented.” Even with respect to the MMV Group, Lavasa has tried to find consensus through settlement meetings; though, according to Gupta of MMV Group, his settlement meeting with Rajgopal Nogja, President, Lavasa Corporation, has not borne fruit) but it cannot be denied that Lavasa needs to ramp up its public positioning with regular statements clarifying the true situation.

This is because even if Lavasa clears the current issues (which they should, as all signs from MoEF point to allowing Lavasa, albeit after charging them a hefty fine), they will require huge amounts of funding in the future – and if the Nobel Prize winning efficient market hypothesis of Stiglitz has to be believed, it is the positive hype than anything else that motivates the public to invest in a large manner. Lavasa’s Nogja accepts to B&E, “The initial funds have been raised by way of secured and unsecured debt of around Rs.14.25 billion from banks and financial institutions, while the promoters and convertible debenture holders have contributed Rs.9.85 billion. Also, we have received over Rs.7.5 billion from customers towards which has also been invested in the project.”

There is a huge list of buildings currently halted at Lavasa, besides infrastructure projects and projects of a number of major retailers. Lavasa was and still hopes to be a benchmark that the globe could look up to. It’s just that they’ll have to first start convincing India.

          

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