Today,more than at any
other time in our history, there is a strong recognition of the need for good governance
and ethics in every sphere of business. The voice of shareholder activism has
never been louder and the focus of regulators perhaps never so intense.The
global financial crisis has taught us that 'infectious greed', which is the
greed to boost profits, increase share prices and get higher bonuses was largely
responsible in causing mayhem in the global financial markets.As world economies
are slowly recovering,regulators have a complex task of understanding the reasons
for the breakdown of corporate governance.It is an onerous task as despite
regulations being meticulously followed and box ticking done in all earnest,
often there are instances when the basic tenets of corporate governance are
violated.In the ultimate analysis, good governance has to be imbibed
internally its genesis lies in the core values and beliefs, not in a rulebook.
While global investor focus
has remained intense on India given the vast investment opportunities,I believe
the sector that will propel the country to a higher level over the next decade
will be the construction sector.The construction sector encompasses a wide
gamut from residential and commercial real estate to building physical infrastructure and manufacturing plants.Given the larger role that the construction
sector is envisaged to play, the role of governance particularly in this sector
should assume greater importance.
The real estate sector in India has shown considerable
improvement from the loss seen last year following the liquidity crisis in
October 2008.Having recovered from a difficult period, now is an ideal time for real estate companies to introspect on what went wrong and revisit their
core corporate governance principles.The essential ingredients of corporate
governance are integrity,accountability and transparency.If any of these are
ignored or sidelined,the repercussions can be severe.
At this juncture,developers must show prudence and
refrain from arbitrarily increasing real estate prices.There is a fine line
between making profits and profiteering and it is in the interests of the
entire sector that developers stay away from the latter. Unrealistic prices and
speculation, particularly in the residential segment have detrimental effects across the economy.If the common man seeking
a roof over his head keeps getting out-priced from the market, it can lead to
social unrest.
On the other hand, a system that enables more people to own a
home has a positive impact on the socio-economic fabric of society.Affordable
housing should not be a segment that get priority only when there is a lull in
the high-end luxury residential segment.The demand for affordable housing is
unquenchable.Developers who recognize the vast opportunities in this segment
will reap benefits in the long run.It is a segment that is recession proof and
has demonstrated that it is commercially viable as long as the projects are
executed in the right manner.
Real estate is one of the few key sectors in India today
that does not have a regulator.Thus the need for consumer protection becomes
all the more necessary.Buying a house is the single largest investment a
person makes in his or her lifetime. Why is it that time and again, consumers
get the raw end of the stick simply because they are unable to decipher the
exact liveable space that they are paying for?Why is it that apartments are
not sold only on the basis of carpet area but arbitrarily on built up or even
super built up area? Surely the real estate developer community can voluntarily imbibe this practice, even if the respective state governments do not mandate
it.
Furthermore, developers have to ensure that projects are completed on time.
A majority of the consumers are first time home buyers and they put all their
faith and trust in developers. Endeavours to bring about greater transparency,
fairness and standardisation into the real estate industry should not be
resisted.The industry will also benefit from increased professionalism and
ethical standards if there are specified norms and qualifications to real
estate brokers.Certainly,more efforts need to be channeled in devising a
single window clearance mechanism for approval processes.This will not only
save time, but reduce costs as well.
If one reflects back over the last ten years, one can see
that the real estate sector in India has made considerable strides.In the
early 1990s when fly-by- night operators were rampant, today they have been successfully
weeded out of the market. A decade ago, even the large developers were local
players, today India has several well-reputed pan-India developers.Financials
of developers used to be opaque, but today corporatisation and listing of
several real estate companies have brought in greater transparency in their operations.
While there are several
real estate initial public offerings (IPOs) waiting in the wings, one does hope
that they will be priced realistically.Overly high valuations of certain recent IPOs are cause of concern.The unrealistic pricing resulted in them
listing at a discount to their IPO prices.A failed IPO at this juncture will
set a bad precedent and could have serious repercussions on the entire market.One
hopes that real estate companies will adopt a cautious approach while tapping
the capital markets.Ultimately,markets always differentiate and ascribe
higher valuations to those that voluntarily seek to constantly raise the bar of
corporate governance standards.
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