Sebi banning DLF from markets isn't wrong, even though it may hit home buyers

The fallout of market regulator Sebi barring DLF from capital markets for three years has been extensive already. The stock price of DLF crashed a little over 28 percent in a single trading day, wiping out Rs 7,439 crore of investor wealth. Even though 75 percent of the company’s stake is held by the promoters, small investors have also been left in the lurch.

As Firstbiz columnist Vivek Kaul pointed out in his piece , the problem lay in the fact that DLF was deep in debt and the Sebi ban will only ensure that they can’t pare it down any time soon by accessing the markets. But there’s greater collateral damage as well: buyers of DLF homes who may be left in the lurch.

In a piece in the Economic Times, Vinay Pandey argues that the Sebi verdict has been unusually harsh by barring the entire company from accessing capital markets and will directly impact home buyers who have invested in under-construction projects of the company.

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"…a blanket rule that precludes corporate prosecution just because there will be collateral consequences is neither desirable nor justified. A company is a legal entity and it should be liable to action for every wrongdoing. That decision, however, must consider the fact that a company’s decisions are made by promoters, shareholders and managers. Therefore, a disproportionate share of blame and punishment must fall on them and not the corporate entity, especially when collateral consequences are large," he writes.

There is a certain validity in the argument. After all the ban that has resulted in DLF being barred from capital markets has purely to do with the non-disclosure of links with a subsidiary during its IPO. The subsidiary had a case filed against it by an individual who alleged that he had been duped by the real estate company.

However, as the Sebi order noted, DLFseems to have feigned ignorance about subsidiaries despite it being controlled by the wives of three executives who seem to have beenmereplace-holders on the smaller firm’sboard. (Read more about that here )

There isn’tany major criminality in what DLF has done in this case, but it isn’t the only taint against the real estate major. Among other things, a high court did not find the allotment of 350 acres of prime land in Gurgaon by the Haryana government to DLF “transparent, fair, just and reasonable” and the Competition Commission found that DLF had abused its market dominance in the Belaire project. (Read more about its recent controversies here )

In the case of the Sebi order, as with any regulatory orderagainst a major corporate, there is always the possibility of collateral damage.Employees risk losing jobs, shareholders risk wealth erosion or, as in this case, home buyers risk seeing projects they invested in getting stuck. However, while seemingly disproportionate, theSebi seems to have gone completely by the book in the matter of DLF. Given that the company failed to tell shareholders the entire truth while listing on the markets, it should ideally not beable to continue to do so until it can prove transparency in its structure and corporate governance.

DLF spent the money raised on building a land bank and over-stretching its finances on other businesses which ranged from wind power andinsurance tomutual funds andluxury hospitality that it is now attempting to exit. Investors were happy to play along as long as the company could access funds, but if the Sebi order is upheld the stock may be worth as much as the paper it is printed on.

Home buyers facing stalled projects by DLF should ideally take the companyto task for it. It willalso perhaps force the government to finally look at the regulation of real estate companies and the sector at large that has for long run roughshod over buyers. Until that it resolved there could be many similar cases where the ‘collateral damage’ remains the home buyer.