Here's a quiz that seasoned Indian investors will find easy to answer: What is common between these sectors: petrochemicals, financial services, infotech and real estate? They are obviously, sectors that at some point or the other, were hot stories that attracted investors in large numbers. Of these four great sectoral booms, the first three, regardless of whether they threw up any genuine winners, attracted a lot of shady operators who managed to swindle investors who should have known better. The fourth boom, that of real estate, is now under way and if past experience is any guide, investors need to be even more selective than they should have been in the past.
The petrochemicals stock boom happened a long time ago in 1992-93, when it seemed that practically every businessman in the country wanted to become the next Dhirubhai Ambani. I remember we routinely heard of public issues for petroprojects which were one tenth or even less than the minimum economic sizes. But it didn't seem to matter and investors lapped up the tall tales told by promoters with enthusiasm. In the end a lot of investors became poorer and a lot of promoters richer.
Next came financial services in 1995-96. This time around, everybody and his uncle became a merchant banker. There were literally hundreds of financial services companies that were floated and brought IPOs at ridiculously high premia. None of these issues were allowed to fail by the investors of this country, who, all appeared to be in competition with their neighbours on who could lose more money. Almost every single one of these companies has vanished now.
After the excesses of the financial services mania had been forgotten came the great IT gold rush of 1998-1999. This time, creating an illusion of good investments was even easier for unscrupulous promoters because at the core of the IT boom were two or three companies like Infosys and Wipro which really were great investments. Why, some promoters even renamed their companies and put the word 'Infosys' in their names. While the ghosts of some of these faux Infosyses are still haunting various exchanges, we are well into the fourth instalment of this exciting story-real estate.
Am I saying that all real estate stocks are swindles? No, far from it. What I am saying (on the basis of a historical precedent) is that whenever a sector becomes hot, it starts attracting a disproportionate number of unscrupulous promoters. Currently, real estate fits this pattern perfectly. Therefore, any investment in this sector must be made with great caution. Moreover, there can't be anyone in this country who doesn't know the special affinity that the real estate sector has to unaccounted cash dealings, money laundering and related activities. In many parts of the country, it is simply not realistic to expect a real estate developer to be immune to such dealings. True, the blame for this situation lies with the kind of tax regime we historically had, but we can't wish away this legacy.
No doubt this is a sunrise sector but it is one where investors will always have to have a higher level of scepticism than normally needed. I'm sure that there are many great real estate companies that will come up, but you will have to look carefully to identify them.
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