Agency Cost Issue at Earthcon Group- Real Estate Builder in

Noida
Typically a builder starts a project in Noida by taking land from the Noida authority on a 1520 years lease and starts a project. This means that the capital investment required is
relatively low. The next step is to announce the project to the public and take initial booking
for 15-20% of the proposed number of flats/shops (very attractive prices offered) from
interested end customers and small, medium investors, who may invest by booking one or
may be 4-5 flats/shops in the project. This helps the builder to raise capital. The cost of capital
is nominal compared to the cost of capital that can be acquired from the open market (15-25%
interest rate per annum) or from banks etc. (12-16% interest rate per annum). The builder is
then supposed to reinvest the capital raised in the construction of the project and sell other
proposed inventory at a steeper price once a particular construction stage is achieved. This
construction milestone also enables the builder to raise a demand letter to get more funds
from the existing investors/customers for the next phase of construction. This cycle us
repeated for the various construction milestones and finally the project is delivered, i.e. the
end customer gets the flat and the investors can choose to exit (investors can in fact exit any
time by reselling their flats to other interested buyers/investors) or put their flats./shops on
rent.
Earthcon followed the same route for their initial project by selling the proposed inventory to
the end customers and other investors for a very attractive prices. The market was booming at
that time. The project was deemed initial success as the second phase of bookings increased
the base selling price of the project by up to 30% . However, instead of putting the money in
Casa Grande construction, the company decided to get another piece of land from the Noida
authority and announced another project. Once again, investors and aspiring end customers
put their money into this project named CG-2. The company followed a similar strategy and
had about 15 joint ventures with other small time companies/entrepreneurs in a matter of 34years.
However, not even a single flat was ready for possession during these years. All projects were
way behind schedule. Some of the blame could be attributed to the lack of clearances given
by the various authorities. However, the biggest reason was that funds raised from the
investors/customers to construct the project were routinely diverted to make a land-bank and
announce other projects. By 2014, the market had slowed down considerably and the
company had 100s of customers/investors who were waiting for their projects to be delivered.
The irony was that on majority of the projects the basement slab was not casted, and worse
the de-watering of the land could not happen i.e. the first phase of the construction was not
even started. Customers and investors were left red faced. Some end customers became
incredibly flustered and disillusioned as they had invested their hard earned savings in
Earthcon for a dream called home. The market had become so difficult that exit was very
unlikely and the sunk cost for the investors meant that they had to either go through a
litigation(which was not a preferred route for many considering the Indian Legal system and
the various overhead costs associated with hiring a lawyer) or wait & hope that someday they

would be able to get their flats/shops.

In my opinion the company is an example of a privately owned firm whose actions initially
increased the price of the assets of its stakeholders and then created a very large social cost
that has left the society worse off.