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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.

  • Anonymous says:

    >I think I am missing something somewhere. Say I own a company X1 and another company X2. Say now company X1 has a lot of land/real estate. And I want it to make sure that balance sheet/financial results of X1 look good. However If X1 sells its land/real estate to X2. X2 has to pump in the extra money from somewhere. And as X1 and X2 both are owned by me how can I show the profit ? If X1’s value has increased because of extra cash flow from X2. X2 has sucked a lot of money out of the owner and its value has decreased because of large debt.
    I hope that I am making sense here
    Samarth Modi

  • Deepak Shenoy says:

    >Samarth: Simple – X1 invests the money into X2! So if the land sells for say 5 crores, X1 puts 5 crores as capital into X2, which is returned as sale proceeds. It moves money from one type of reserve to profit. (tier II capital, into tier I capital – retained profits)

    The SPV can be partially funded by outside parties also (who will get a return based on the cash flow from rent).

    I’m not sure how legal it is for this entity to take debt from the parent, but if that’s ok, then that will be done as well.

  • Padmanabhan says:

    >I remember reading somewhere that Walmart does this too. and, since the land is not owned directly by IOB now and since IOB has to lease it from the special purpose company owned by IOB, the lease expense will be considered as an expense in future. Saves tax. and if the SPV returns the money to IOB as say dividend, the dividend is also tax free as it is given to a holding company. So, I guess IOB is still going to make more money by saving on taxes, even though it has to pay one time registration fee etc.

    correct me if I am wrong


  • Deepak Shenoy says:

    >padmanabhan: Interesting angle there. Consider Rs. 100 being paid to SPV as rent.

    Rs. 12.36 will be paid as service tax on the rent.

    SPV has to pay tax on its income – assume Rs. 30 is let go as expense, and tax is Rs. 24 (34% of the remaining Rs. 70)

    Some Rs. 36 is paid out as service tax plus income tax paid by SPV.

    But the service tax paid out to the SPV can be adjusted against service tax received by the bank, so net net they pay 24%, which is less than the 34% income tax they would pay otherwise. That should be a good saving, as you said.

  • Anonymous says:

    >More news on IOB? They lost some area at Mumbai Nariman Point due to documentation of wrong areas in their Nariman Point branch area. Municipal authorities demolished their R.50 lacs worth of basement area 2 years ago.
    Another residential area in Sher-e- Punjab is bought 25 years back and without ownership. Worth Rs. 4 Crores now.
    Now another property at Prime residential bandra area is wasted for past 8 years.
    Like these there are many may be all over India
    Who buys and lease it to IOB must be a Charity organisation!

  • feltra says:

    From this, I realize one thing…. The Accounting profession is probably the most honest and ethical of all the professions!! 🙂

  • Sawan says:

    Did IOB do it? How successful was it?