Housewives of DLF: How the spouse factor led to Sebi crackdown

While barring realty major DLF, its chairman KP Singh and five other senior executives from capital markets for three years, market regulator Sebi noted the role of three women it refers to as ‘housewives’ for their role in the matter and has revealed the complex dealings that go into real estate deals in India. (Read full text of order here )

The basis of the complaint against DLF was one Kimsuk Sinha who filed complaints in 2007 alleging that he had been duped of Rs 34 crore by Sudipti Estates Private Limited and related persons for the purchase of land.

He alleged that the firm was controlled by DLF Home Developers and DLF Estate Developers that were both part of DLF group and sought that the company not be allowed to list on the markets. However, the allegations were refuted by DLF, who said that the Sudipti Estates wasn’t a part of the group.

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However, Sebi in a show cause notice to the company noted that three real estate companies, Sudipti Builders, Felicite and Shalika lay at the heart of the controversy and the deals to acquire land.

In its show cause notices, the market regulator noted how three arms of DLF divested stake in Felicite to three ‘housewives’: Madhulika Basak, Niti Saxena and Padmaja Sanka all of whom happened to be wives of key managerial persons in DLF.

Here are the two charts that seek to explain the shareholding pattern:

[caption id=“attachment_104732” align=“alignleft” width=“640”]  Image courtesy: Sebi order[/caption]

[caption id=“attachment_104733” align=“alignleft” width=“640”]  Image courtesy: Sebi order on DLF[/caption]

Sebi in its show cause notices pointed out that despite divesting stake in the three companies, DLF continued to retain control of the three real estate companies, one of which was accused of fraud.

However, DLF refuted the show cause notice by Sebi saying that it wasn’t illegal for a person to invest in a company’s shares merely because she was a housewife or because a joint account held with her husband was being used to fund transactions.

“The fact that the spouses of certain employees of DLF were shareholders of Felicite does not lead to a legal inference that Felicite is a subsidiary of DLF,” the company said in its submission.

The company also refuted the allegation that the ‘housewives’ continued to hold stake in one of the companies only while their husbands were employed by DLF. It pointed to the case of one Reema Hinduja who continued to be a shareholder in the company even after her husband quit the company and said that it was wrong to infer that the DLF had any control over the three real estate companies.

However, Sebi whole time member Rajeev Agarwal noted in his order that while it was an undisputed fact that the ‘housewives’ involved in the real estate companies used joint accounts with their husbands to fund the deals, the women who stake in the three companies weren’t even regular investors.

“It is further noted that these ‘Housewives’ were not regular investors/traders in the
securities market and they did not have any income of their own,” the Sebi order noted.

Sebi noted that the three women were the wives of the Group CFO, Senior Vice President (Finance) and Vice President (Finance) of DLF and the three executives were listed as key management persons in the company’s prospectus for the IPO.

“They were also subject to the control of DLF due to their “employee and employer relationship”. The respective wives held 100% shareholding of Felicite, which in turn held 100% shareholding in Shalika, which in turn held 100% shareholding in Sudipti. Therefore, it has been alleged that DLF never lost control of Felicite, Shalika and Sudipti,” the order noted.

Sebi noted in its order that the purchase of all shares in Felicite were not made by the ‘housewives’ but their husbands and also pointed to the fact that the shares held by the women were only transferred to the wives of other senior management of DLF.

“In my view, it cannot be just a coincidence that Felicite is incorporated on March 26, 2006 with its 100% shareholding held by the wholly owned subsidiaries of DLF, those wholly owned subsidiaries subsequently sold their entire shareholding in Felicite to the ‘Housewives’ of three KMPs who made payments for the purchases made by their respective wives and subsequently, they transfer their entire shareholding to the DHDL (one of the three initial shareholders), wholly owned subsidiary
of DLF and the ‘Housewives’ of other KMPs,” the order noted.

Sebi noted that the DLF management had employed a “plan, scheme, design and device to camouflage the association of DLF with its three subsidiaries namely, Felicite, Shalika and Sudipti” and noted that the realty major had actively concealed the filing of an FIR against one of the subsidiaries when it was filing for an IPO.

“In the facts and circumstances of this case, I find that the 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,” the order noted.

Sebi noted that DLF suppressing the information about its subsidiary companies in its IPO filing constituted a grave offence and had larger implications on the safety and integrity of the capital markets.

“In my view, for the serious contraventions as found in the instant case, effective deterrent actions to safeguard the market integrity. It, therefore, becomes incumbent to deal with contraventions, digression and demeanour of the erring Noticees sternly and take appropriate actions for effective,” the order noted while barring the DLF executives for three years.