The Smelting Cauldron (Book Excerpt) by Raj Raman

Raj Raman holds an engineering degree from NIT Rourkela and a postgraduate degree in Management (PGDM) from IIM Bangalore. He has a rich and diverse experience of over thirty years across industries from manufacturing to services, and has been instrumental in the growth and establishment of a number of these enterprises. His stints across the country have enabled him to appreciate and deal with the nuances of a diverse country like India.

He has led a number of organizations, and also served on their boards. He currently owns and runs a successful boutique consulting firm, specializing in SMEs, supporting and enabling their growth and expansion, while playing the role of a coach and mentor to the promoters and entrepreneurs at the helm of such companies. Below you can read an excerpt from his book, The Smelting Cauldron. Courtesy: Rupa Publications.

Book Excerpt from The Smelting Cauldron by Raj Raman

Greed Expectations

Arun sat stunned: his mind had stopped functioning for a moment as he digested, or attempted to digest, what he
had just heard and seen. He had heard a very loud horn and had seen a Rolls Royce Phantom drive through the gates of the famous Price Towers. Mr Govardhan Gupta sat pompously in the rear seat, grinning from ear to ear at the acquisition of his new toy. His young brat pup, Pantaki Gupta, or ‘the Punk’ as he liked to call himself, sat next to the driver and waved to Arun.

Arun, let’s go for a ride bro,’ he declared. ‘Dad is going to be in the office for at least a few hours, and we can do a couple of rounds of Noida till then. Shamsher will drive us!’

Not left with much of a choice, Arun slid quietly into the seat Gupta senior had vacated, with the Punk sliding in next to him. Govardhan Gupta waved the boys on, delight barely hidden on his face as he watched his two prized possessions exit the gates of Price Towers. As the car zipped through the various happening sectors of Noida, Arun could not help but reflect upon how his life had been transformed during the past six months.

Arun Kumar was from a lower-middle class family. He had lived all his life in a Railway Colony. He had worked his
way through an engineering degree at one of India’s premier institutes, NIT Rourkela, and had topped it with an MBA from IMT Ghaziabad.

He had graduated in 2009, a year when the placement scene had not been very promising. However, he was fortunate to have had the Punk as a classmate. He and the Punk had become close thanks to Arun’s notes and consistently high CGPAs. Arun had always thought that the Punk had befriended him in the hope that some of Arun’s intelligence and hardworking ethic would rub off on him, but the brat was too lazy and dumb to change.

As it turned out, the Punk spoke very highly of Arun to Gupta senior, and based on his darling boy’s recommendations, Mr Gupta had offered Arun a very handsome salary, and a car to boot, to be part of his real estate start-up venture. Arun Kumar had thus entered the corporate world, a dork and a naïve kid who had visions of making his mark in the industry, the real estate sector, which, as they had learnt at IMT, was unorganized and on the cusp of professionalizing. Needless to say, Punk was also one of the four MBA graduates who was
inducted into the fledgeling company.

The early days were a whirlwind of learning and late hours, interspersed with visits to the various watering holes in the National Capital Region (NCR). Arun had learnt how land was acquired as a first process of creating a real estate project. It was also a default option, as the Guptas were essentially land acquirers who had helped the doyens of the industry in Noida to aggregate land parcels and then convert them into gated communities for residences or commercial exploitation. Agricultural land, wasteland, traditional family heirloom land and some political bonanzas were aggregated and converted to non-agricultural, commercially exploitable parcels.

The four recruits had been put under Mr Upadhyay who had explained what an acre, hectare and other units of area were. They also had classroom-like sessions with Mr Sunil Mathur, who was an ex-chief operating officer of a very large player in real estate and who had been entrusted with their education and grooming.

It was during this early period that Arun’s first tryst with values verses value took place. An innocuous question posed to Mr Upadhyay had got him a response that stunned him.

He had asked, ‘If we are buying parcels at `60,000 to `1 lakh per acre, then why are we valuing them at `20 lakh per acre in our books?’

To which the response had been, ‘There is a cost of conversion, and we have incurred that cost. Hence, our land
is now valued at `20 lakh per acre. This is the norm in the industry.’

‘But aren’t we overstating this cost? I remember Mr Sunil telling us that the typical cost of conversion is not greater than 200 per cent of the value of the land purchased, at its worst,’ Arun had countered.

‘Value needs to be created, boy! This is how real estate value is created,’ had been the cryptic response.

However, Arun thought the sentiment reeked of greed and had vowed to take it up with Sunil Mathur the next day.

He had confronted Sunil the following day with the question. Sunil, in his laconic style, had quipped, ‘Valuation is driven by expectations, greed expectations.’

Thus began Arun’s education in the business dynamics of the real estate sector, a journey where he was now at a crossroads and had to choose the path he would travel on.

At the time, however, Arun had not probed further and got involved in learning the intricacies of designing gated
communities, studying everything from solid waste treatment plants to power standby plants, from access roads to safety and security systems. He also learnt how to evaluate and shortlist vendors for the various construction processes and the project management team.

Then came the time of reckoning. It started with the application for the bank project finance. Gupta senior had
involved him and the Punk in the negotiations with the bank.

‘Our land bank is 150 acres and is valued at `33 crore. Hence, we are seeking `75 crore, which is a little less than 70 per cent of the total project cost of `110 crore,’ Mr Govardhan Gupta told the bank.

Arun could not believe his ears. That is when the answer to the question of why the overvaluation, dawned on him. So here was the connect and the leverage of greed into further expectations, he thought to himself.

The general manager of the bank, which was a large publicsector undertaking, politely nodded and then said, ‘Guptaji, the processing fees will be 1 per cent, and I would also like a private word with you as we go to see our ED.’

Saying this, he walked out with Gupta senior, who turned and winked at his son conspiratorially.

Pantaki later revealed to Arun that there was a ‘facilitation fee’ of 1.5 per cent to make the deal go through.

The arrangement worked and soon both the office and the site were buzzing with activity. The excavations were on in full swing. The customer centre, with its model apartment, miniature model of the community, renderings of the various views, sound and light show, and young nubile salesgirls and handsome salesboys, all trained and in snazzy attires, was put on priority and was nearing completion; it looked as good as the lobby of any premium luxury hotel in the world. There were consultations with priests, marketing agencies, PR agencies and several senior brokers in Noida to decide upon a good day and date to formally launch the sale of the first apartments in
this future community.

As the day and date of the launch drew nearer, there were hectic parleys on which blocks would be sold first, the price structure, the floor rise pricing, the broker commissions, the upfront payments to be made by customers, and the agreement to be signed by them, which was a cleverly worded agreement to sale that only committed that they had the first right to the purchase of the apartment located in such-and-such building, on such-and-such floor. The financing companies and banks also wanted their clauses incorporated, and it took numerous meetings with lawyers and many sleepless nights to stitch the various pieces together.

Arun had absorbed it all; he was learning a lot, but there was a nagging sense of guilt at being a party to what was beginning to look like a scam. There were 1,200 apartments, and with each apartment potentially selling for close to a crore, the project would garner `1,200 crore for the Guptas, with an investment of only `3 crore. Such multiples made no sense to Arun, but he had not had the opportunity to chat with Sunil again on this. He promised himself that he would raise the issue and clear his doubts as he was becoming increasingly uncomfortable in this environment.

The big day dawned; there was much celebration and pomp at the puja conducted that morning. The cocktails and dinner that evening were a great success. They had set up a stall at the venue to record interest and bookings from potential customers; the lines there told the story of how successful the launch had been. Guptaji was beaming from ear to ear, and the Punk was busy trying to get some of the girls there to join him for an evening out after the formal event had ended.

As for Arun, he managed to track down Sunil Mathur. ‘I can’t understand the payment structure. We are charging a 10 per cent booking fee and giving 50 per cent of that back to the brokers. Is this how it works? If so, then for every apartment booked, the broker is making a cool `5 lakh; and we have received over seven hundred bookings today! The collection from the bookings is over `70 crore, which is far higher than what we have spent on this project till date,’ Arun rattled off the facts.

Sunil was in an expansive mood. A single malt in his hand, he decided that Arun should learn all the facts. ‘This is the Dickens of the real estate industry. Greed Expectations, my boy. Now, do you realize why everyone and their uncle wants to be a party to this? And you do not know half the story.’ He leant in close to Arun and whispered, ‘You are forgetting the cash collection of `10 lakh per apartment that that customer has to deposit with Guptaji’s munim tomorrow morning. This is how this industry works, my friend. Have I told you what Mr Gupta plans to do with the money he has collected?’

Just as he was about to spill the beans, however, the Punk came looking for Arun and dragged him off to have a celebratory drink together.

The following morning, the appearance of the Rolls Royce Phantom had completed the picture for Arun. As he sat in the expensive car, he made a resolve. He would have nothing to do with this conniving, manipulative and exploitative and self-gratification culture. His belief in integrity, customer focus and reasonable returns had no place in this environment. He realized that he would end up a moral wreck if he continued to be a party to this game.

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