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Regulatory valuation support for an Indian real estate private equity fund

Engagement: SKP was engaged by a large Indian real estate fund to perform a fair valuation of its investments across India for various commercial and regulatory purposes such as buy-back of shares, issue/transfer of shares under the Foreign Exchange Management Act (FEMA) guidelines, estimation of SWAP ratio in case of a merger and demerger.

The fund made investments in commercial and residential properties across several cities in India in joint partnership with major developers. The investments were made through a Special Purpose Vehicle (SPV) by equity or quasi-equity instruments such as compulsorily convertible debentures (CCDs) and compulsorily convertible preference shares (CCPs).

Solution/Value Addition
Our team reviewed property prices in the respective areas and key assumptions were considered in terms of Floor Area Ratio (FAR), land, construction cost, etc. for evaluating the fair value of its investments. We also reviewed distribution clauses, exit clauses, options (the developer’s call option and investor put option) in the shareholder’s agreement and considered the implications of the same in analysing the cash flow model. Subsequent to the analysis of the cash flow model, the distributable amount to respective shareholders was estimated based on the waterfall structure or internal rate of return (IRR) expectations and hurdle rate. Such distributable cash flows were discounted at an appropriate rate based on the capital structure and class of shares to calculate the fair value per share. This ensured that the valuation carried out is not only commercially viable but also stands any legal scrutiny.