Sebi-DLF case may have wider ramifications for realty sector

New Delhi: As realty giant DLF fights a three-year capital markets ban imposed by regulator Sebi, the case is being seen as one having wider ramifications for the entire real estate sector and the regulatory framework applicable to them.

Sebi barred DLF and six others, including the company's chairman and other top executives, earlier this month from accessing capital markets for three years for "active and deliberate suppression" of material information at the time of its public offer more than seven years ago in 2007. The company has challenged the order through an appeal before the Securities Appellate Tribunal (SAT), which would hear the case next on October 30.

During the first hearing last week, the company sought an interim relief from the Tribunal, while the regulator faced the flak for delay in passing the order and also for the adverse impact suffered by minority shareholders of DLF in the form of a huge 30 per cent plunge in the company's market valuation in a single day post the order. While promoters own 74.93 per cent stake in DLF, foreign institutional investors have close to 20 per cent and retail shareholders have about 4 per cent among others.

As the case progresses, the industry experts are of the opinion that it could potentially become a watershed case for the capital markets and other regulations applicable to the real estate companies. Without willing to be named, as the matter is currently before SAT, top executives from real estate sector and capital markets intermediaries said the case needs to be seen in a different perspective from those pertaining to sectors other than real estate.

At the same time, the role of merchant bankers, legal advisors and others involved in the process of making IPO-related disclosures also needs to be examined, they said. The case has also brought to limelight 'technicalities' involved in the practice of Sebi giving 'observations' and not 'approval or clearance' for an IPO, they added.

There is a view that regulators need to understand that the business practices tend to be different in real estate sector, from manufacturing or other segments of the economy. However, others feel that regulations cannot be overlooked to accommodate certain 'prevailing practices' in one particular sector, such as those related to use of 'friendly' entities for purchase of land or development rights in the name of ease of doing business.

In his order, Sebi's Whole-Time Member Rajeev Agarwal said violations were "grave and have larger implications on safety and integrity of the securities market" and accused DLF and the six top management persons (at the time of filing IPO documents) of non-disclosure of certain dealings with three subsidiaries through "sham transactions".

While Sebi has not imposed any monetary penalty, the prohibition has barred DLF from any sale, purchase or any other dealings in securities markets for a period of three years, including for raising funds. This is one of the rare orders by Sebi where it barred a blue-chip firm and its top promoter/executives from market.

DLF had debt of over Rs 19,000 crore as on June 30, 2014, while its already-proposed fund raising plans include Rs 3,500 crore through issue of certain bonds to replace costlier debt. It has annual turnover of nearly Rs 10,000 crore. Seeking an interim relief, DLF has submitted before SAT that it needs to redeem funds, including those locked in mutual funds as also through redemption of certain bonds. SAT has sought Sebi's reply to the company's plea for interim relief.

During the last hearing, the Tribunal observed that Sebi, while passing its much-delayed ban, should have envisaged the impact of its regulatory actions on the investors. "What were you doing all these seven years and when the company applied for IPO way back in 2007? Why didn't you envisage the impact of your actions on the investors as they have lost more than Rs 7,500 crore of their wealth even as you try to be a world class regulator?"

SAT Presiding Officer J P Devadhar told Sebi counsel. DLF's counsel termed the Sebi order as a "death warrant" and not just a ban from the markets. The regulator has also been accused of not checking the revised IPO documents and the 'delta view' in 'track change mode' about the status of subsidiaries and associate companies.

After the Sebi order, DLF had said in a statement on October 13 it has not violated any laws and would defend its position against any adverse findings in the order. "DLF has full faith in the judicial process and is confident of vindication of its stand in the near future," it had said. Sebi began its probe after a Delhi High Court order in April 2010, wherein the regulator was asked to undertake an investigation into the complaints made by Kimsuk Sinha, who had also filed complaints with Sebi in 2007.

The complaints were mainly related to DLF's dealings with some of its allegedly related entities--Sudipti, Shalika and Felicite, which Sebi termed as "sham transactions" and employing "a plan, scheme, design and device to camouflage the association" of DLF with these three entities.