All is not well with DCM, as both its contractors for the prestigious Bara Hindu Rao real estate project are fighting the cash-starved Bharat Rams in court.

By Rajeev Dubey

On June 24, 1998, the two Delhi-based real estate developers, Kailash Nath & Associates (KNA) and Ansal Properties & Industries (Ansals), received a missive from one of their biggest clients, the Rs 183.70-crore DCM Ltd. A four-page letter terminated their contract to construct the Rs 1,165-crore residential-cum-commercial DCM complex over 67.03 acres in the Bara Hindu Rao area of the capital. Over the next 2 months, both builders independently obtained restraint orders from the Delhi High Court preventing DCM from selling off the property they had already sold even as DCM's 62-year-old Chairman, Vinay Bharat Ram, initiated talks with other real estate developers to complete the project.

Under the watchful guard of a tight-lipped security force, an unhealthy silence permeates the Bara Hindu Rao Complex today, where work has come to a complete halt. This marks yet another twist in a 16-year-old real estate deal, which was first envisaged in 1982, when the company decided to close down its textile mill. The latest denouement, say the Bharat Rams, will impact an ailing DCM. A restructuring proposal submitted to its lead financial institution, the Industrial Credit & Investment Corporation of India (ICICI; 1997-98 income: Rs 5,969.86 crore), in July, 1998, admits: "Since the viability of DCM was, primarily, (based) on the strength of the expected inflows from its real estate project, the delays in (the) completion of (the) project have taken its toll on the company's financials."

True. In the year ended December 31, 1996, DCM incurred a loss of Rs 45.65 crore, which came down to Rs 39.77 crore the next year. Worse, with a debt burden of Rs 340 crore, DCM--which, apart from the real estate project, has engineering, data systems, and textiles divisions--has defaulted on its loan-repayments, and was forced to submit a proposal to the ICICI to raise additional money. Clearly, the absence of the projected Rs 1,233.76 crore of cash-inflows from Bara Hindu Rao is hurting DCM. Admits Sumant Bharat Ram, the 31-year-old son of Vivek Bharat Ram, and Deputy General Manager (Real Estate), DCM: "A lot of our problems are due to this delay. We would have had no problems if the project had been completed as scheduled by 1995."

However, it is the delays, claim the builders, that may also have given DCM an opportunity to increase its share of the estimated Rs 682.69 crore of profits from the proposed complex. Earlier, to compensate KNA and Ansals--both real estate developers declined to speak to BT on the record--for the construction costs and the requisite approvals for the project, the Bharat Rams chose to share the profits by allowing the builders to directly sell 17.26 lakh square feet (sq ft) out of the total built-up area of 39.15 lakh sq ft. However, claim the builders, the promoters are now trying to sell the entire property themselves by inviting a new contractor who will only be compensated for the construction costs. Which is, of course, a smart strategy.

The dynamics of the old contract. Under the earlier arrangement, the company would have been able to directly sell only 10.09 lakh sq ft--or 25.77 per cent--of the total built-up area. Apart from the builders' shares, DCM sold its rights "in part of the properties relating to the flatted factories and residential apartments to be constructed under its real estate development" to DCM Estates & Infrastructure Ltd (DCM Estates). In fact, between June 30, 1994, and April 23, 1996, DCM, and some of the closely-held companies of the group, transferred sale-rights pertaining to 11.78 lakh sq ft to DCM Estates for Rs 251 crore (or an average of Rs 2,132.17 per sq ft).

Two factors forced DCM to transfer the rights to DCM Estates, which was promoted by the former (stake: 5 per cent), its other shareholders being Vinay Bharat Ram (6.10 per cent), 6 investment companies controlled by the Bharat Ram family and their associates (55.65 per cent), and the Singapore-based Tiara Holdings (33.15 per cent). For one, the deal ensured an influx of much-required cash into DCM, which had spent Rs 100 crore to pay off the 8,000 workers of the now-shut textiles unit. Explains Ajay Shrivastava, 35, Director, Dimensions Corporate Finance Services, which designed the financial restructuring: "We paid off all the workers through borrowings and by selling the property rights to DCM Estates."

However, since the Bharat Rams--as the majority shareholders of DCM Estates--did not have the requisite cash to pay DCM, other investors were invited to pick up stakes in the new company. Agrees Shrivastava: "We had to bring in outside investors." Subsequently, Tiara Holdings, which is owned by the $1.60-billion Thakral Group of Singapore, pumped in Rs 70 crore into DCM Estates by purchasing 130 lakh shares (face value: Rs 10) at a premium of Rs 44. As of December 31, 1997, DCM had received Rs 166 crore from DCM Estates as part-payment for the transfer of the selling rights.

According to the documents filed with the Office of the Appropriate Authority, DCM Estates paid between Rs 1,350 and Rs 1,400 per square foot for the residential property in 1994. Obviously, the price paid in 1996 was much higher: around Rs 2,700 per square foot. Since the completion of the project has been further delayed, the Bharat Rams now have an opportunity to get higher returns closer to the completion of construction. If and when, of course, the moribund real estate market in the country perks up.

In fact, DCM had estimated that the price of its residential property would rise to Rs 3,500 per square foot by January, 1999. And prices are expected to increase by 1.50 per cent every quarter thereafter. Given this--and the fact that DCM has agreed to pay 10 per cent of its own sales proceeds to DCM Estates--the latter will gain at DCM's expense. While both the Bharat Rams and Tiara Holdings refused to comment on this, says Sanjiv Ahuja, who looks after the investments made by Tiara Holdings in India: "Due to the sensitive nature of the project, we will not be able to comment on anything."

The dynamics of DCM's new strategy. Evidently, the profit-sharing agreement that DCM has cancelled would have resulted in low earnings for DCM. Sumant Bharat Ram reveals the new gameplan: "We will pay money to the new builders only for the construction charges to build the residential apartments and the flatted factories." Since the construction costs are estimated at Rs 300 crore--which is only 25 per cent of the projected income--DCM stands to earn profits of Rs 682.69 crore instead of only Rs 170 crore under the old agreement.

Not surprisingly, the KNA petition filed before the Delhi High Court on August 20, 1998, obliquely alleges: "Thus, the termination of the agreement is merely a pretext to serve their (promoters') own ulterior motives and to take advantage of escalated real estate prices." Differs Sumant Bharat Ram: "The problem has been of slow construction and low quality. Our architect, C.P. Kukreja, wrote a letter (to us) saying there were quality problems with the construction work." Adds the reply filed by DCM in response to KNA's petition on August, 19, 1998: "(DCM) is suffering losses of opportunity cost of the land lying idle, when it could have been put to productive use but for the inordinate delay caused by the Petitioner (KNA) and Respondent No. 2 (Ansals)"

Of course, the immediate provocation for the termination was DCM's non-payment of the second instalment of its share in the cost of the proposed fly-over on Rani Jhansi Road, near the project-site. In November, 1996, after a detailed traffic study, the Delhi Urban Arts Commission--which looks at the aesthetics of large construction proposals--recommended that a Rs 323-crore fly-over should be built in the area to ease congestion. Since its project would add 10 per cent to the existing traffic, DCM was asked by the Municipal Corporation of Delhi (MCD) to cough up a proportional Rs 32.30 crore to finance the fly-over. And, on August 20, 1996, DCM's building-plan was cleared by the MCD on the condition that the amount would be paid in 4 equal instalments within 18 months time.

Since this additional expenditure was not accounted for in the original agreement between DCM and the builders, the trio signed a new Memorandum Of Understanding (October 30, 1997), which stated that while DCM would pay Rs 14.30 crore, KNA and Ansals would together pay Rs 18 crore as their share. Although the builders paid the first instalment of Rs 2.50 crore each, they expressed their inability to pay the second instalment of Rs 2.25 crore each. This was when the public disagreement began. Questions Sumant Bharat Ram: "They were supposed to pay the second instalment. Instead, they sent us a letter (dated April 15, 1997) stating that they could not pay. How could they have completed the project if they could not pay a small amount like that?"

The builders have a viewpoint too. States the KNA petition: "... as per the MoU and written communication of the Petitioner (kna), the Respondent No. 1 (DCM) alone was liable to pay (the builders' share of the second instalment)." To buttress this point, the contractors point to Clause 3 of the MoU, which states: "In case KNA and/or Ansals are not in a position, for any reason whatsoever, DCM shall pay that amount of that party to the MCD. KNA and/or Ansals would be required to reimburse this amount to DCM within 120 days, along with interest at 24 per cent per annum for the first 60 days from the date of payment to MCD, and at 30 per cent per annum for the next 60 days of delay in payment."

The MoU also stipulated a penalty in case the builders didn't pay the instalments. For a default of any instalment, it states, an area of 6,700 sq ft from the builders' share would stand mortgaged in favour of DCM, and Vinay Bharat Ram "whose decision would be final and binding on all parties to this mou" had the freedom to sell that in the open market. It was, thus, DCM's responsibility to make the necessary payments even if the builders refused to pitch in.

Given DCM's precarious financial position, Vinay Bharat Ram tried to prevent the payments being levied on the company. On June 18, 1997, he wrote to the then-Lieutenant Governor of Delhi, Tejendra Khanna, with a request: "I will be most grateful if such a heavy financial burden is not levied on us, specially in view of the fact that we are unable to mobilise this payment in the present circumstances." But the request went unheeded. And, on June 26, 1997, the MCD shot off a letter ordering DCM to stop work at the site. The letter read: "You are requested to discontinue/stop the work immediately and fulfil all the conditions (including the payment of the instalment) laid in the building-plan immediately"

Over the next 12 months, DCM successfully negotiated with the MCD to spread the payment of the instalments over the construction period of the fly-over itself rather than in the 18 months ending February, 1998. The DCM's restructuring plan submitted to the ICICI states: "Out of this (total), Rs 8.10 crore has already been paid to mcd and the balance Rs 24.20 crore has been assumed to be paid in 2000 as per discussions with mcd." Later, on June 24, 1998, the builders received the termination letter. While the cases are still sub-judice, the Delhi High Court has appointed an arbitrator to assess the work completed by the 2 contractors. But no one is willing to guess how long it will take for the dispute to be resolved.

Now, Sumant Bharat Ram claims that 3 builders have agreed to step in if the contracts with kna and Ansals are terminated. They include Larsen & Toubro (L&T), Shapoorji Pallonji, and Tirath Ram. But L&T, for one, denies it has any agreement with DCM. Says L&T's Regional Manager (construction), A. Shivasubbu: "We are not constructing any project for DCM, and have not signed an agreement with it for the Bara Hindu Rao project." However, Sumant Bharat Ram is confident, and says: "We now want to get a big, reputed A-class builder to complete the project. Our credibility is now at stake." And so too is the future of the 109-year-old DCM.

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