Delhi HC raps Sebi for not probing DLF's IPO violations

By Paranjoy Guha Thakurta

In a judgment that has hardly been publicised, last Thursday (21 July) the Delhi High Court orally rapped the regulator of the country’s capital markets, the Securities and Exchange Board of India (Sebi), for batting on behalf of real estate company DLF Ltd in a private dispute.

The court directed the regulator to probe whether the DLF group had concealed material facts before its initial public offering (IPO) of shares in 2007.

The allegation levelled against the DLF group is that it sought to conceal its association with a particular company against which a criminal complaint was pending by divesting this company’s shares before the IPO. These shares were transferred to other companies controlled by the wives of senior executives of DLF.

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A division bench of the court, comprising Chief Justice Dipak Mishra and Justice Sanjiv Khanna, told the lawyer representing Sebi, Neeraj Malhotra, that the job of the regulator was to regulate and “not take sides” in a private dispute.

While delivering the judgment, Justice Mishra observed that as regulator, Sebi may “ruffle the feathers” of those involved in half the disputes it had to resolve, but it had no business making a “frivolous” appeal against an earlier order of a single judge of the court directing the regulator to investigate whether DLF had indeed violated its regulations and guidelines.

Here’s a chronological account of the dispute:

12 May 2006: DLF submits its draft “red herring” prospectus to Sebi seeking to raise around Rs 9,500 crore through an IPO of shares.

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October 2006: DLF purchases roughly 50 acres of land in Bhandwari village near the Gurgaon-Faridabad road from Kimsuk Krishna Sinha (KKS) for a sum of approximately Rs 34 crore though a company, Sudipti Estates Pvt Ltd (SEPL), which was then a 100 percent subsidiary of DLF. The agreement was that the land would be jointly developed by KKS and the DLF group. Of the agreed transaction amount, KKS claims he paid Rs 31.09 crore to SEPL.

2 January 2007: A modified prospectus is submitted to Sebi.

26 April 2007: KKS claims SEPL “ensnared and cheated” him of his property and files a first information report (FIR) in the Connaught Place police station in New Delhi. (The police subsequently filed a closure report which has been challenged by KKS in the Delhi High Court.) He thereafter files a criminal complaint before Metropolitan Magistrate Sudesh Kumar in the Patiala House court, New Delhi, against DLF, SEPL and specific executives and officers of the DLF group, notably Praveen Kumar, managing director, DLF Home Developers Ltd (DHDL), who happens to be the nephew of KP Singh, chairman of the DLF group.

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25 May 2007: DLF again modifies its draft “red herring” prospectus and the final version is placed on Sebi’s website.

4 June 2007: KKS writes to Sebi informing the regulator about his dispute with SEPL and the DLF group.

25 June 2007: Sebi replies to KKS saying his letter had been forwarded to SEPL and DLF for their response.

11 July 2007: DLF writes to KKS denying his allegations and claims the company has no association with SEPL as on that date. DLF claims that whereas in 2006 SEPL was controlled by two of its wholly-owned subsidiaries, DHDL and DLF Real Estate Developers Ltd (DREDL), SEPL was no longer its associate.

29 October 2007: Claiming that Sebi had not acted on his complaint, KKS files a writ petition in the Delhi High Court against Sebi, DLF and other group companies.

18 December 2007: KKS files an additional affidavit referring to Clause 6.11.1.1 of the Sebi (Disclosure and Investor Protection) Guidelines 2000 which require disclosure of “outstanding litigation involving the issuer company”. KKS contends that on the date of the disclosure of the “red herring” prospectus, that is, 25 May 2007, an FIR stood registered against SEPL, which was a constituent of the DLF Group. He alleges that the sale of the entire shareholding of DHDL and DREDL in SEPL was a “sham transaction hurriedly executed only to avoid disclosure of the pending litigation involving SEPL in the prospectus”.

(It transpires that a complex set of transactions took place on 30 November 2006. That day, DHDL and DREDL sold their shares in SEPL to a company named Shalika Estate Developers (Pvt) Ltd, which too is controlled by DLF through three companies, DHDL, DLF Retail Developers Ltd (DRDL) and DLF Estates Developers Ltd (DEDL). The last-named three companies transferred 100 percent of their shares to yet another company, Felicite Builders & Construction (Pvt) Ltd, which in turn was controlled by the wives of a clutch of senior executives of the DLF group, including Padmaja Sanka, wife of Ramesh Sanka, group chief financial officer, DLF, Madhulika Basak, wife of Surojit Basak, senior vice-president, finance, and Niti Saxena, wife of Joy Saxena, another senior vice-president, finance.)

9 April 2010: Justice S Muralidhar of the Delhi High Court directs Sebi to investigate whether or not DLF had failed to disclose material information relating to SEPL and its dispute with KKS in its prospectus and submit a report to the court within three months. In the judge’s order, he referred to KKS’s lawyer Amit Sibal (who, incidentally, happens to be Union Minister Kapil Sibal’s son), pointing out that the primary business of DLF was real estate development and that the parent company holds “only 0.5 percent of its land reserves” while the remaining land is “held indirectly through subsidiaries and other corporate entities over which it exercises de facto control”.

(According to PTI, Sebi refused to entertain the complaint filed by KKS on the ground that it was filed a day before IPO was to close. The court, however, turned down the regulator’s contention and said, “Merely because the public issue was closed, Sebi could not be relieved of its statutory duty to conduct an enquiry into the complaint and into the veracity of the statements made in the Red Herring Prospectus.”

21 May 2010: Sebi writes to the company secretary of DLF asking for “details of association” and financial transactions between April 2006 and May 2010 relating to companies in the DLF group, including its associates, promoters, directors and key management personnel. Over and above the companies and individuals already mentioned, Sebi asked for details relating to the following companies, among others: Vikram Electric & Equipments (P) Ltd, Dominique Builders & Constructions (P) Ltd, Lysandr Builders & Developers (P) Ltd, Mudrock Builders & Developers (P) Ltd, Amandla Builders & Developers (P) Ltd, Eldoris Builders & Developers (P) Ltd and Ishayu Builders & Developers Ltd.

July 2010-July 2011: SEPL, DLF and Sebi file an appeal against Justice Muralidhar’s order before a division bench of the Delhi High Court. The case is argued before the bench. The DLF group is represented by Soli Sorabjee, former Attorney General of India. Counsel for Sebi, Neeraj Malhotra, while challenging this direction of the single judge, submits that relevant documents have been called for and that Sebi will investigate the allegations that have been made. Advocate Amit Sibal, representing petitioner KKS, contends that if a promoter disassociates itself from a company, then the same has to be disclosed in the draft “red herring” prospectus and final prospectus. He also argues that Sebi should have looked into the allegations made by the respondent, since it discloses conduct against applicable law.

21 July 2011: The division bench of the Delhi High Court rules against Sebi and the DLF group in favour of petitioner KKS and directs Sebi to investigate the allegations made.

(The writer is an independent educator and journalist based in Delhi whose work cuts across different media - print, radio, television, documentary cinema and the Internet.)