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Should DLF Remain A CNX NIFTY Stock?

Published on Tue, Oct 14,2014 | 16:46, Updated at Tue, Oct 14 at 16:56Source : 

SEBI’s three year ban on DLF, its promoters and some of its employees, raises the question whether DLF should continue as a frontline index stock.

On October 10, 2014, SEBI passed an order barring DLF Limited and some of its key managerial personnel (including the promoter, Mr. K. P. Singh) from accessing the securities market and dealing in securities for a period of three years.

This decision stems from a complaint filed by a private individual alleging that DLF failed to disclose an FIR filed against a subsidiary company - Sudipti Estates Private Limited ("Sudipti") - in its IPO prospectus, and thereby violated applicable securities regulations which require such disclosure.

The High Court directed SEBI to investigate the complaint.

SEBI found that DLF had violated applicable disclosure requirements under the provisions of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 and also violated the  SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, and that there was a clear case of active and deliberate suppression of material information to mislead and defraud investors in the securities market in connection with the issue of shares of DLF in its IPO.

Whilst arriving at this conclusion, SEBI noted that Sudipti had initially been disclosed as a subsidiary of DLF but had subsequently been dropped in the final offer document filed with SEBI on the basis that the shareholding of Sudipti had been transferred to certain individuals.

However, after examining the transfers in detail (including the payment trails for the same), the SEBI concluded that these transfers were an elaborate sham, that control of Sudipti remained with DLF given that the new owners were wives of DLF’s key management personnel at that time, and that Sudipti therefore continued to be a subsidiary of DLF. The SEBI also found that a similar method was employed to disassociate 355 subsidiary companies to give the impression that they were no longer subsidiaries of DLF.

Accordingly, SEBI held that the facts clearly showed that DLF deliberately withheld material information in order to defraud investors in its IPO and therefore passed an order barring DLF, its promoter, and certain key managerial personnel from accessing the securities market for a period of three years.

It remains to be seen whether DLF and the other affected persons will prefer an appeal against SEBI’s decision before the Securities Appellate Tribunal. SEBI’s order will impact any REIT (real estate investment trust) proposed to be launched by DLF and its promoters as these persons are unlikely to now qualify as “fit and proper” persons in terms of the Securities and Exchange Board of India (Real Estate Investment Trust) Regulations, 2014.

SEBI’s order sends out a strong message to promoters and management to take the disclosure requirements under the law seriously. This is another strong message for corporate India to better its governance standards. This order also showcases the impact that a single investor or counterparty (since the entire investigation emanated from a business transaction) can have.

This is not the first time DLF faces a controversy or regulatory action. Recently, the Competition Commission penalized the company with a Rs.630 crore fine. Even earlier, it faced shareholder ire after it delisted from the exchanges in 2003, and soon followed this with a bonus. 

A ban from capital markets for a period of three years in indeed serious. Given this, IiAS questions whether DLF should remain a front-line index stock? Being part of the CNX Nifty, DLF attracts several equity retail and institutional shareholders. Index funds will also be required to hold the stock in the almost the same measure as its weight in the index. But, with the recent SEBI order, markets must question whether it should remain a constituent of a principal index.

The IIAS Report is attached here…

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Attachments : F1_Should DLF remain a CNX NIFTY Stock_14Oct2014.pdf

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