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Economy

Be Sceptical: Mantri Developers Offers 100% "Assured" Returns in 3 Years, Yet Again, While SEBI and RBI Watch

1Mantri Developers is at it again. They’re offering 100% assured returns on your “investment”, and SEBI/RBI do absolutely nothing! In fact, they even compare their offered guaranteed returns to things like equities and mutual funds!

From their web site:

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Sachin tweets this incredible image:

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Note: Someone forgot their mathematics. If you double your money in 3 years, the rate of return is 26%, not 33%.

Plus, the “safety” of your principal is exactly what here? What

Remember, Mantri did it again last year : Guaranteeing 100% returns on a property in Bangalore.

According to @tarun their modus operandi is that you pay 20% down payment, and 80% is a bank loan. They pay interest on the bank loan for three years, and buy back the flat at 120% after three years. Awesome no? (Btw, not legally guaranteed it seems)

Let’s assume this is true.

What’s in it for Mantri? They get money at a way lower rate (10% or so) because the loan is given to you, not them, and they pay only the interest. The extra 20% that they pay if they honour their “guarantee” amounts to about 6% a year. That’s an effective rate of 16% a year – which is perhaps less than they can get from the market.

 

I assume this kind of thing is still on. The problem, as I stated there, is the grey area. There is unlikely to be a “guarantee” in any real sense of the word (that is, which you can take them to court for). A guaranteed return is against all principles of SEBI and RBI which will require that any such return carry all sorts of capital allocation and risk management.

Plus, do you see the little *Conditions apply? That pretty much clinches it. The conditions that will apply will probably not be in your favour.

If there are customers who will buy the property for 120% of the price (or more) three years later, this guarantee works. If not, then we don’t think it’s going to be easy to recover this money – and if you’re the one signing loan papers, you might just be saddled with a loan as well. We would avoid this under any circumstance.

SEBI and RBI don’t allow assured returns like this unless it’s guaranteed on your balance sheet. Effectively, the 100% guarantee is, for them, another loan that is payable in the future, and should technically reflect on their balance sheet. And if they have too many such guarantees, banks should know so that they understand whether they should lend more money to such developers. But our sources say that is not really the case; such assurances are typically signed by a non-authorized person and does not reflect on the balance sheet of the company.

I wonder if the government will still be a silent spectator or actually put this real estate regulator in place. It’s high time we make builders solidly accountable.

  • Ram says:

    Returns from equity in the long run are better than real-estate investments. An insightful article http://www.newscaustic.com/2015/03/should-you-invest-in-stocks-or-real.html

  • Sanjeev B says:

    Deepak, thanks for highlighting this. Public memory is short and compliance is poor, because there is no punishment to break rules. RBI had mandated out against the 80/20 schemes quite forcefully, but these are creeping back now. Do you think media and public pressure can force the RBI and the courts to tighten the screws on real estate companies and their banks? Or do we have to wait for the regulator to be put in place?

  • Agree with you that this is wrong. But let’s also look at the other side of the coin. Who are the people who buy into such schemes? The buyers are mostly HNIs and NRIs who are looking for an “investment” with a 3 year horizon. They are not buying a home to stay into. They can surely see the “conditions apply” sign or that a junior level officer is signing the agreement. Yet they are getting into this. No tears need be shed for them. The people who buy into these schemes and later complain (if the developer defaults) are themselves trying to outsmart the builder and play a “heads-I-win, tails-you-lose” game. Not deserving of any sympathy.

  • Raman says:

    Deepak ji,
    Call me a pessimist if you will, but nobody will be “taken to task”. Today the builders have spread their tentacles in the form of loans into as many banks (and therefore GOI) for GOI (meaning SEBI etc) to take any kind of action. The best that can happen if “enough noise” is raised is that the ads will be silently vanish…..

  • Hi
    I think they are offering 100% returns on investment if the investment is leveraged, that is only your 20% down payment will be considered investment, for example if you pay 8 lakhs for a 40 lakh rupees apartment, after 3 years if the value of the property increases by at least 20% you’ll get close to 100% returns, that way it does make sense,