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Commentary

IOB sells land to itself and rents it back

From Business Standard:

Chennai-based Indian Overseas Bank is planning to sell its properties to self-promoted special purpose vehicle, thus realising the entire profit and then ploughing it back to its Tier-I capital. IOB will do a leaseback deal of properties that it had sold to the SPV.

Fantastic. This is like me selling my house to a company owned by, er, Me. Then renting it back from me. And saying that since I sold, I made humongous profits.

Very interesting, this. Why will IOB do it? Simple – its real estate assets are on the books as the value they were acquired at. They can’t simply revalue them (would probably go into a different account, not profit, but I’m not sure about this).

Who benefits? The government. The sale involves payment of registration fees. The leaseback has service tax on it. So the government should be happy to do this deal. The bank shows a 600 cr. profit so technically shareholders will seem to be quite happy too.

The difference between selling the land to an uninvolved party and this, is that there you lose the ownership, and the leaseback may not be at your terms. Here IOB gets the best of both worlds.

If you’re screaming “unfair!” then consider this: So many people bought all these companies saying “land bank”. This is just like valuing a land bank. If you think that selling to a third party and leasing would be better – think about a scenario today where hajaar companies and banks have land banks at cost. SBI, for instance, has huge tracts of very prime land.

So let’s say SBI sells land to an IOB Special Purpose Vehicle (SPV), and IOB sells its land to an SBI SPV, and they both do leaseback agreements. This will be “above board” to nearly everyone and raise everyone’s profits, and the governments revenues through taxes. Fantastic, no?

Real estate companies do this routinely. Recently DLF announced that it’s revenues were lower by 800 cr. because they cancelled a sale of land to a company named “DLF assets”. Uhem.

If it’s legal for real estate, it should be ok for banks. But what it’s teaching me is: reported financial results cannot be taken at face value.

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