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Tuesday, July 17, 2018

Taj Mansingh must take auction route,ASG’s advice to NDMC

Civic agency sought legal opinion after report by financial consultant Ernst & Young.

Written by Pragya Kaushika | New Delhi | Published: September 25, 2012 12:46:49 am

Civic agency sought legal opinion after report by financial consultant Ernst & Young.

The Additional Solicitor General of India has advised New Delhi Municipal Council to auction The Taj Mahal Hotel on Mansingh Road,the 33-year lease for which ran out in October last year.

The civic agency sought ASG Rakesh Kumar Khanna’s opinion after its financial consultant,Ernst & Young,suggested that “NDMC should take legally tenable option” before deciding the fate of The Taj Mahal Hotel,popularly known as Taj Mansingh.

In his remarks,Khanna said “any extension would be a case of fresh grant only” as there is no clause in the agreement — between NDMC and Indian Hotels Company Ltd (IHC) — for extension of lease.

The public auction,Khanna noted,will also determine the “fair market price” of the hotel property.

“Licence deed provides that NDMC has an option to grant a licence for a further period on such terms and conditions as may be mutually agreed upon. The licensee can only request for licence for a further period. As such the licensee after the lease period is over by efflux of time,there being no renewable clause to seek extension has no right to continue in occupation of premises and any extension would be a case of fresh grant only. In view of law laid down by the High Court and upheld by the Supreme Court in Aggarwal and Modi’s case (of Chanakya cinema),NDMC has no option but to grant lease to hotel building by invitation for participation in public auction so as to fetch fair market price and maximum returns,” the ASG said.

The agreement between NDMC and Indian Hotels Company Ltd (IHC) ran out in October last year and IHC was allowed a one-year extension of lease,which will end next month.

The civic agency is expected to take a decision on the property by the end of this week.

Ernst & Young,in its final report,suggested that extension of lease to IHC for 30 years would be profitable for NDMC if given at a revised rate of licence fee. But the consultant had added that a legal opinion in the matter was essential.

E&Y report names IHC as the most profitable operator

The New Delhi Municipal Counil had earlier asked for a revision of the report submitted by private consultant Ernst & Young on whether to auction Taj Mansingh or extend its lease.

The civic agency noted that the Ernst & Young report did not compare similar hotel properties situated in other states and revenue sharing of IHC with other agencies were not studied.

Ernst & Young prepared a second report,which advised NDMC to seek legal opinion on Taj Mansingh.

On the doubts raised by NDMC,the financial consultant said Taj Mansingh is located in Lutyens’ Delhi area,which is a very niche market and it may not be suitable to compare it to any other property outside Delhi. But the consultant did provide a few comparison case studies (see box).

The financial analysis listed out three scenarios for future operations of the hotel:

If hotel is operated by private sector partnership,the present value of cash flow would be Rs 3,543 million

If operated by IHC,the cash flow would be Rs 6,088 million

If operated by NDMC,the cash flow would be Rs 2,581 million.

In first case,high expenditure and construction period of 1.5 years is estimated. In the second,hotel will continue operation as normal. The third case notes lack of capacity to efficiently handle the property,making it non-viable for NDMC to operate it.

Ernst & Young also told NDMC that asset-based valuation is a technical study and can take “considerable amount of time and will yield no meaningful results”.

In the final report,Ernst & Young explained why they arrived at 15 per cent,29 per cent and 25 per cent as revenue share schemes.

“10% to 25% has been provided keeping in mind past revenue sharing arrangements that NDMC has undertaken with four hotels in Lutyens’ Delhi. While (at the) lower end of spectrum is 10.5%,which is (the) scheme with Taj Mansingh,the higher end of spectrum is based on 23% revenue share (that) NDMC has with hotel The Connaught,” the report said.

The consultant suggested that the final price can be arrived at through negotiations with IHC or through bidding process,depending on NDMC choice.

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