GIANT IN DISTRESS

The times are definitely not being too kind on the real estate giant. A hard­ hitting double whammy-one delivered by Supreme Court and the other by the stock market  regulator- has the country’s biggest realty player DLF writhing in pain even as it stares at a tremulous future. Sparking concerns about  the  ability of  the  realtor  to  fund projects  and  repay  loans, the implications of these developments for the realty sector in general and the National Capital Region in particular are immense

October the Thirteenth was ill-fated  for the country’s  biggest  realty  player  DLF Ltd. It was the day an October 10 order uploaded on the Securities and Exchange Board of India (Sebi) website  well  after  trading hours  on  October  13 barred the company  as well as six of its top executives, including the Chairman  and main promoter KP Singh, from  the securities market  for three years for “active  and deliberate  suppression” of material information at the time of its IPO.

In his 43-page  order, Sebi’s Whole-time Member Rajeev Agarwal  said that  the “violations are grave and have larger implications on safety and integrity of the securities market”.

Expectedly enough, the  company’s  shares tanked over 28 per cent when the markets reopened on October 14.

The  more-than-four-year-long  Sebi  probe   found that a “case of active and deliberate suppression of any material  information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO is clearly made out in this case.”

It was a double whammy, for, two months ago, the Supreme Court had ordered the company  to pay a huge   630-crore fine  imposed  on  it by the Competition Commission  of India  (CCI) for alleged unfair business practices.

Besides KP Singh, those  barred  from   the  markets included his son Rajiv Singh (Vice-Chairman), daughter  Pia Singh (Whole-time Director), Managing Director  TC Goyal, former  CFO Ramesh Sanka and Kameshwar Swarup, who  was Executive Director (Legal) at the time  of  the company’s public  offer  in 2007.

While Singh, his two children and Goyal are still on the board of DLF,Sanka is no more with the company.

While  the  regulator  did  not  impose  any  monetary penalty, the restraining  order would bar DLF and the six persons, from  any  sale, purchase  or  any other dealings  in securities markets for  a period  of  three years, including for raising funds.

Sebi said that  all these six persons were part  of top management at  the  time  of  filing  IPO documents, wherein the company was accused of non-disclosure of  certain  dealings  with three  subsidiaries  through “sham transactions”.

DLF is the largest real estate group  in the country with a nearly 10,000 crore annual turnover  and market  capitalisation of  over  26,000 crore. The company’s market cap had crossed one lakh crore mark soon after its listing in 2007,butfelllater. The Singh   family   and   related   entities   are   major promoters with 74.91 percent stake of DLF.

Big Implications

The massive plunge  in  DLF shares after  the Sebi order   has  sparked  concerns  in  some  quarters about   the  ability   of  the  realty  major   to  fund projects and repay loans. A section of the analysts is of the view that  the  ruling  could  force DLF to lower  property  prices leading  to  an overall correction in the National Capital Region given the company’s market leadership in the region.

There is also a view that that  the Sebi decision is unusually  harsh because of  the  collateral  fallout and possible disproportionately large cost to other stakeholders, especially people who  have bought houses in DLF projects. Treating corporate entities and the promoters/executives alike means that the heavily-indebted DLF that needs funds to complete ongoing projects will not have any capital market access for three years. It cannot raise equity to pare down debt or raise more loan funds.

The likelihood of banks getting jittery rolling  over debt or increasing their exposure to the company is also not  ruled out.  Minority shareholders holding company’s stock have already lost over 25 per cent of their value on the very day the DLF shares got a battering. Those who  have bought houses in around 25 under-execution DLF projects could be the next in the list of losers, if there is a delay.

The latest Sebi ruling comes as a double whammy for the real estate developer which in August was ordered  by the Supreme Court to pay  630 crore fine  imposed  on it by the CCI for  alleged  unfair business practices.

A Bench comprising Justices Ranjana Prakash Desai and NV Ramana had said in its interim  order that DLF will have to submit an undertaking to pay 9 per cent interest on the penalty slapped on it by the anti-trust regulator  in August 2011 that was later upheld in May this year by the Competition Appellate Tribunal. The apex court  had asked the realtor to pay an initial  amount of  Rs50 crore and Rs25 crore in interest within three weeks.

• The more-than-four-year-long Sebi probe found that a “case of active and deliberate suppression of any material information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO is clearly made out in this case”
• Besides KP Singh, those barred from the markets included his son Rajiv Singh (Vice-Chairman), daughter Pia Singh (Whole-time Director), Managing Director TC Goyal, former CFO Ramesh Sanka and Kameshwar Swarup, who was Executive Director (Legal) at the time of the company’s public offer in 2007
• DLF is the largest real estate group in the country with a nearly 210,000 crore annual turnover and market capitalisation of over 126,000 crow
• The massive plunge in DLF shares after the Sebi order has sparked concerns in some quarters about the ability of the realty major to fund projects and repay loans. A section of the analysts is of the view that the ruling could force DLF to lower property prices leading to an overall correction in the National Capital Region given the company’s market leadership in the region
• There  is also a view that that the because decision is unusually harsh  because of the collateral fallout ;nd possible disproportionately large cost to other stakeholders, especially people who have bought houses in DLF projects
• The latest Sebi ruling comes as a double whammy for the real state developer which in August was ordered by the Supreme Court to pay Rs630 crore fine imposed on it by e CCI for alleged unfair business practices
• The company and its top executives were found to have violated various regulations, including Sebi’s Disclosure and vector Protection (DIP) guidelines and the PFUTP  (Prevention of Fraudulent and Unfair Trade Practices) norms

BANNED TRIO

Past Controversy

Significantly, about a year back also, DLF was dragged into a controversy when anti-graft activist and Aam Aadmi Party chief Arvind Kejriwal created a political storm   by  accusing   Robert  Vadra,  son-in-law  of Congress  president   Sonia  Gandhi,  of  corruption. Kejriwal had alleged then  that  Vadra purchased  at least 31 properties, mostly in New Delhi, worth more than  Rs300 crore  for  which  money  had come  from “unsecured  interest-free  loans from  DLF Ltd”. Although both Vadra and DLF denied the allegations, the controversy resurfaced as recently as in the first week of October.

In  the  latest  Sebi order, the  company  and  its  top executives were found  to  have violated various regulations, including Sebi’s Disclosure and Investor Protection (DIP) guidelines and the PFUTP (Prevention of Fraudulent and Unfair Trade Practices) norms.

The company  is alleged to have executed a series of sham transactions  to  disown  a subsidiary company accused of  duping a person in a land  transaction. Also, the company did not mention the FIR against its subsidiary and a key management person in this matter in the final prospectus filed with the Registrar of Companies.

According   to   the   case  details   culled   out   from published  media reports, in April 2007, one Kimsuk Krishna Sinha had filed an FIR against DLF subsidiary Sudipti  Estates and  Praveen Kumar, nephew  of  KP Singh, for  duping him of  Rs4 crore in a land transaction. Sudipti had only two shareholders, DLF Home  Developers  Ltd  and  DLF Estate  Developers Ltd, both 100 per cent subsidiaries of  DLF. The complainant wrote to Sebi on June 4,requesting that the listing of DLF shares be disallowed and immediate action be taken. DLF shares were listed on the stock exchanges on July 5, 2007 after the completion of the IPO process.

A week later,the company wrote to DLF denying any connection with  Sudipti. Sudipti and two  more subsidiaries of DLF- Shalika Estate Developers and Felicite Builders & Construction-were incorporated in  March   2006.  The  shareholders  in  Shalika  and Felicite were  DLF Home  Developers, DLF Estate Developers and DLF Retail Developers.

On November  29, 2006, the entire shareholding in Felicite held by DHDL, DEDL and DRDL was sold to Madhulika Basak, Niti Saxena and  Padmaja Sanka. These three persons were wives of Surojit Basak, Joy Saxena and  Ramesh Sanka, key management personnel of  DLF.  The following day the  three  DLF arms sold their 100 per cent stake in Shalika to Felicite,and the two DLF arms sold their entire stake in Sudipti to Shalika. This chain of transactions, ended DLF’s association with Felicite, at least on paper, and also made Sudipti a 100 percent arm of Felicite.

The Sebi report  states: “Even after the sale of entire shareholding in Sudipti,  Shalika and Felicite by the wholly-owned  subsidiaries  of   DLF,   there  was  no change in the composition of the Board of Directors of  these  three  companies.” Also, the  Sebi probe found   that   there  was  no  change  in  any  of  the authorised signatories of the bank accounts of these three  companies.  Further, it found, there  was  no change   in   their   registered   office   and   statutory auditors

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