Regulations
Stop Punishing Investors for the actions of Rogue Promoters

Why are investors of DLF and FT asked to pay the price for their promoters’ behaviour?

 

On 10th October, the Securities & Exchange Board of India (SEBI) closed a very reluctant, seven-year investigation into dubious disclosures by DLF Limited by barring the company, its chairman KP Singh and key directors from the capital market for three years.

 

When the news hit the market, the stock crashed 28%. It was the biggest fall since its second listing in 2007. Some Rs7,500 crore of market-capitalisation vanished in a day as the shares, which were offered at Rs525, in a highly controversial and hyped up initial public offering (IPO), dropped to just over Rs100.

 

But, in contrast to its action against the Sahara group, SEBI has not covered itself in glory this time. If anything, the buck for DLF’s dubious disclosures should stop at the regulator and not the small investor.

 

The action against DLF, and similar such actions, highlights a basic flaw about SEBI’s penal action: Why is the retail investor constantly punished when regulators, investment bankers, auditors and companies fail to act? But SEBI is not alone in this. The ministry of corporate affairs (MCA), on 22nd October, in a similarly bizarre order, has hit the investors of Financial Technologies (FT) by ordering a forced merger of the National Spot Exchange Limited (NSEL).

 

This, again, is a regulatory failure. There is no investigation into why the ministry of consumer affairs granted an investigation to permit NSEL and another spot exchange promoted by the NCDEX to be set up in the first place. The FT stock crashed over 20% after the draft order was issued.

 

Would someone explain how FT’s retail investors are any less the victims than NSEL’s investors? Equity investment is about informed risk-taking, not a gamble. But why are minority shareholders in India being made the victims of lack of clarity on the part of regulators? Punish the promoters of DLF and FT by all means; but why destroy companies and their minority investors for regulatory failure, or promoters’ mischief and regulators’ laxity?

 

SEBI’s action against DLF seems more like a headline grabbing antic aimed at pleasing a new government that may not be so cordially disposed towards the company. In the process, it has also hit bankers who need to recover nearly Rs20,000 crore from DLF.

 

Predictably, DLF has appealed the order and the huge expenses incurred on exhausting all its legal remedies will also be borne by the company’s shareholders.

 

Let’s take a quick look at the DLF case:

 

• SEBI permitted DLF to re-list through an IPO, in 2007, without going into the details of a complaint filed by one KK Sinha who had land dealings with the company.

 

• SEBI, probably, thought DLF would be smart enough to take care of Mr Sinha’s issues.

 

But remember, the same DLF, which had previously de-listed its shares in a hurry in 2003, had gone to great lengths to ditch minority shareholders who had held on to their stocks (there were only 1,100 investors and DLF eventually had to provide benefits to 25O-odd). Despite their stupendous personal wealth, DLF’s promoters showed the same arrogance and callousness in dealing with Mr Sinha whose dogged fight has ultimately forced SEBI to act.

 

• A similar attitude probably led to the Competition Commission of India imposing a fine of Rs630 crore on DLF for abusing its dominant position to hurt a set of apartment owners at Gurgaon. If anything, DLF’s attitude to its minority investors of 2003, its Gurgaon flat-owners and Mr Sinha raises serious questions about the quality of independent directors and legal advisors that this company has appointed.

 

• KK Sinha had a claim of Rs31.09 crore against Sudipti Estates (over development of land), a subsidiary of DLF, in May 2006, when its first red herring prospectus was filed.

 

Immediately thereafter, a series of legal contortions and transfers of ownership of shares occurred and, when DLF filed a fresh prospectus in 2007, Sudipti Estates was no longer shown as a subsidiary. But Mr Sinha refused to be brushed off. He conducted his own investigation, filed a first information report and, eventually, moved court to show that the de-subsidiarisation was a sham and the shares were transferred to the wives of key management personnel.

 

• Were investment bankers involved in the scheme? Kotak Mahindra was one of the lead managers. Its associate, Kotak Bank, provided loans to the three housewives (married to DLF’s managers) to buy the shares of Sudipti Estates to create the fiction of an independent company.

 

• Given that DLF’s splashy re-listing at the peak of the global financial market mania was touted to create the most valuable company in India, wouldn’t you expect its legal advisors and investment bankers to advise the company to settle Mr Sinha’s dispute? Such was DLF’s arrogance that the same petty games that it played to shake off 1,100 retail investors who had clung to their shares after the 2003 delisting, was in evidence in the Sinha case.

 

• But Mr Sinha wasn’t going away. He moved court against SEBI’s ‘deliberate inaction’. The regulator still did not act. It dragged its feet, obfuscated and argued that Mr Sinha, who was not an investor, had no locus standi on the matter. SEBI’s excuses for not investigating the details provided by Mr Sinha were that Sudipta Estates was an unlisted company and that DLF’s promoters had denied his allegations.

 

• Embarrassingly, the Delhi High Court had to point out to SEBI that its stand on action against unlisted companies was exactly opposed to the Sahara twin companies’ case. It ordered the regulator to investigate and also pulled it up for dragging its feet. None of this made much of a difference as long as a Congress-led government was in power and reports about Robert Vadra’s land deals made headlines.

 

• After a BJP-led government came to power, SEBI’s actions picked up speed and we have a half-baked order in less than four months. Several other complaints against companies perceived to be very close to the previous government are similarly being dusted down.

 

SEBI can get away with this, because, as Moneylife has repeatedly pointed out, the rules of disclosure and transparency that it mandates on companies do not apply to its own actions.

 

Why did SEBI not act against the investment bankers, Kotak Mahindra, who certify that the disclosures in the prospectus are true, fair and adequate? In this case, the involvement of the investment bankers is evident. Is it because SEBI officials know that the pressure to delay action against the realty giant had nothing to do with the investment banking community and was entirely about the promoter’s clout?

 

We know that too; but, by ignoring the statutory role of investment bankers, it encourages them to collude with dubious management and makes a mockery of the checks & balances built into the regulatory processes. Only if they are forced to pay a price, will investment bankers take their job seriously, instead of bleating about being guided by lawyers and audit firms.

 

Our capital market operates in a system where the regulator is not accountable for its acts and omissions, but has managed to convince policy-makers to empower it with draconian powers without a reciprocal obligation to issue fair orders, in a reasonable time.

 

In a DLF-like situation, the corrective action would be a monetary penalty against the promoters and ring-fencing the company from their actions. Even in the Financial Technologies case, retail investors will be punished for the actions of its promoters. This allows the losses to be distributed and the legal fees paid by the corporate entities while the management continues to enjoy unlimited power and perks accrued through listing.

 

Far from instilling confidence in the regulatory system, such flawed, delayed and capricious actions will only keep investors away from the capital market.

 

(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected])

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COMMENTS

K G Krupal

2 years ago

Regulators collect registration fees from intermediaries. Having charged monetarily are they accountable for them?

Bhavna Agrawal

2 years ago

Suchita,

Its not only the investors in DLF but even their customers are suffering and there is not support.

There are multiple protest and new articles at their first Bangalore project.

They treat their customers and retail customers as they are authority.

In case you need to talk to their Bangalore project customers and know their pain and trouble, let us know.

rs

2 years ago

Where collusion is there, they are also equally liable for penal action. The charges are paid to Investment Bankers and they have to be made accountable. They just cannot go scot free by making generalised statements.

The certification procedure also need to be changed with the onus on the certifying entities too, without properly verifying the records/satisfying themselves.

rs

2 years ago

Investors need to be cautious while investing. Rather buyer should be beware. Government cannot afford to provide cover for equity investments. Of course, fraudulent acts of promoters need to be arrested and acted upon to trace the unjustly enriched wealth.

LALIT SHAH

2 years ago

AUR company KI khabar nathi per NSEL ME BJP-RSS KA KOI NETA FANSA LAGTTA HAI BAKI INVESTORO KE PAISE DUBAKE BAHOT COMPANY OR PROMOTERS BHAG GAYE AISI VANISHED CO.KE PROMOTERS YES KARTE HAI

LALIT SHAH

2 years ago

AUR company KI khabar nathi per NSEL ME BJP-RSS KA KOI NETA FANSA LAGTTA HAI BAKI INVESTORO KE PAISE DUBAKE BAHOT COMPANY OR PROMOTERS BHAG GAYE AISI VANISHED CO.KE PROMOTERS YES KARTE HAI

Saurav Bhattacharyya

2 years ago

Well, Kotak Mahindra Bank and its promoter(s) is a clever man indeed, he can swing with every new govt., now the 'man' speaks 'well' about the BJP and the PM. This same man was all praise of the earlier govt. In every budget analysis he takes great pleasure to 'praise' the existing govt. and never ever speaks the truth about a budget...which govt. can punish it for whatever act of its. Now, DLF could not do what Kotak could, since DLF was part of the the Vadera group, so it was punished. Look at JSPL, the BJP brokers, most of whom are Gujus, will surely drive down all the cong. loyal's businesses and their stocks.
Do you, Ms Dalal, agree these punishments are only a power game, each govt. plays, you and I know, SEBI or the HCs and the SC are just puppets in the hands of each govt.!!! That's called a third world country.

Dhanaji Kenjle

2 years ago

If I remember rightly, a couple of decades ago, DLF renegaded on many Fixed Deposits of many investors. Some investors went to court and of course it led to nowhere, many of the older ones died and thanks to our enlightened practices, cases are still pending!!
The main issue here is that DLF has always been a twilight-zone operator in the corrupt Delhi scenario with the likes of Vadra, Hooda, and high ranking bank officials' names popping around in the murky depths of illegal finance practices. Who is going to bell the cat?
Capt Kenjle

shanti Patel

2 years ago

As usual Congratulation to Mrs. Dalal for bringing to surface the reality. As long as CONGRESS government was in power, nothing has happen and change in government has changed the SEBI to issue order.
I was representing Shareholders Association at the meeting with senior officers of Sebi and realised that there was a casual approach by such officers towards protecting the interest of the common investors.
Unless such persons are PUNISHED within reasonable time, the things are not going to improve.
Shanti K. Patel

shanti Patel

2 years ago

As usual Congratulation to Mrs. Dalal for bringing to surface the reality. As long as CONGRESS government was in power, nothing has happen and change in government has changed the SEBI to issue order.
I was representing Shareholders Association at the meeting with senior officers of Sebi and realised that there was a casual approach by such officers towards protecting the interest of the common investors.
Unless such persons are PUNISHED within reasonable time, the things are not going to improve.
Shanti K. Patel

Kinshuk Chandra

2 years ago

Yep,to some extent article is correct, but decision taken by SEBI is correct, as investors should now learn that they should put money in companies with good promoter track record. I agree that even investment bankers should be punished.

Kinshuk Chandra

2 years ago

Yep,to some extent article is correct, but decision taken by SEBI is correct, as investors should now learn that they should put money in companies with good promoter track record. I agree that even investment bankers should be punished.

Mitranand Financial Services Pvt Ltd

2 years ago

DLF and FT both are well known for poor corporate governance and rogue promoters.... that is risk they have taken... and they have to pay for it and they deserve it...SEBI can not help them and no one should expect it from SEBI.

sharad

2 years ago

What makes investors stay put in companies when the management openly confirms 15 months from now that they are unaware of business which contributes substantial chunk to its bottomline - Questions to be asked on how private equity did their assessment - It is just that in Satyam it was proven and admitted but in FTIL - it is proven but yet to admit

sharad

2 years ago

What makes investors stay put in companies when the management openly confirms 15 months from now that they are unaware of business which contributes substantial chunk to its bottomline - Questions to be asked on how private equity did their assessment - It is just that in Satyam it was proven and admitted but in FTIL - it is proven but yet to admit

Nifty, Sensex will struggle to make fresh highs – Weekly closing report

Nifty is rising on low volumes and may struggle to retain this week’s gains

 

The S&P BSE Sensex closed the week that ended on 23rd October at 26,851 (up 743 points or 2.84%), while the NSE's CNX Nifty ended at 8,015 (up 235 points or 3.02%). Last week, we had mentioned that Nifty might try to rally. This week, the Indian stock market opened with a gap on the back of positive data from the US and the winning of Bharatiya Janata Party (BJP) in Haryana and Maharashtra assembly polls helped build up the positive sentiments. Nifty closed at 7,879 (up 100 points or 1.28%) on Monday.

 

Last week, we had mentioned that Nifty might try to rally. This week, the Indian stock market opened with a gap on the back of positive data from the US and the winning of Bharatiya Janata Party (BJP) in Haryana and Maharashtra assembly polls helped build up the positive sentiments. Nifty closed at 7,879 (up 100 points or 1.28%).


The BJP secured a clear majority in Haryana and forming the government in state on its own. The party emerged as the single largest party in Maharashtra and is likely to form the government in state with support from other party. US consumer confidence unexpectedly rose in October to the highest level in seven years, showing a brightening in Americans' moods as gas prices drop and the labour market gains traction. The Thomson Reuters/University of Michigan preliminary sentiment index for this month increased to 86.4, the strongest since July 2007.


On Tuesday as anticipated, the index managed closing in the green after making a smart recovery from the day’s low. Nifty closed at 7,928 (up 48 points or 0.61%) making it the third consecutive day of gain.


According to Moody's Investors Service the Indian government's decision to remove price controls on diesel and to raise natural gas prices, signals fiscal discipline and is a "credit positive" step, although the overall impact could be limited.


The Supreme Court had cancelled 214 coal licenses last month; these were issued to private and public companies since 1993. The Narendra Modi government, on Monday, announced that it would auction 74 coal-mining licenses to private companies in the next three to four months. The government will allocate government companies licenses without an auction. This move is likely to help power, cement and steel sectors, which will get more fuel supply.


Market on Wednesday moved higher in line with positive closing of US indices on Tuesday and positive closing of most of the Asian indices. Nifty closed at 7,996 (up 68 points or 0.86%).


The positive news from the US supported market sentiments. Sales of existing homes rose in September, hitting the fastest pace in one year and rebounding from an unexpected drop in August, the National Association of Realtors reported on Tuesday. The annual rate of 5.17 million was better than expected.

 

The market was open for a special trading session on Thursday to mark the start of Samvat 2071. Index kept up the positive momentum of past four trading session. Nifty closed at 8,015 (up 19 points or 0.23%). The one hour of trading saw a gap up opening followed by range bound session.


Friday market was closed on account of on account of public holiday.
For the week, all the other indices closed in the green. The top two performers were Auto (6%) and Infrastructure (5%).


Of the 1,500 companies on the NSE, 1,153 companies closed in the green, 316 companies closed in the red while 31 companies closed flat.


Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors for this week were:

 

ML Top sector

 

ML Worst sector

 

Con_EPC_Infra

7%

Software & IT Services

1%

Auto

7%

Refineries

2%

Lifestyle & Leisure

6%

Chemicals

3%

Sugar

5%

Oil & Gas

3%

Steel

5%

Industrial Intermediates

3%

 

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Nifty, Sensex to rally some more – Wednesday closing report

Nifty will face resistance at around 8,050

 

After hitting a 12-day high (including today) the Indian benchmarks made further gains for the fourth consecutive session Wednesday. After a gap up opening, the indices moved in a range and closed at the day’s high for the last trading day of Samvat 2070. The stock market will only be open for an hour from 6.30 pm Thursday for Diwali Muhurat trading. The markets are closed on Friday, 24 October 2014, for Diwali.


The S&P BSE Sensex opened at 26,783 and moved in the range of 26,712 and 26,818 and closed at 26,787 (up 212 points or 0.80%) while NSE’s CNX Nifty opened at 7,998 and moved between 7,975 and 8,005 and closed at 7,996 (up 68 points or 0.86%). NSE recorded a volume of 66.85 crore shares. India VIX fell 2.25% to close at 13.0300.


PMC Fincorp (15.33%), which hit its 52-week high, was also the top gainer in the ‘A’ group on the BSE. Jindal Steel (10.17%) continued to be among the top two gainers in the group. The upmove is supported by the Modi government stance to auction 74 coal-mining licenses to private companies over next three to four months. Natco Pharma (8.83%) was among the top three gainers. Its marketing partner in the US, Breckenridge Pharmaceutical Inc received a tentative approval from the US FDA for Armadafinil 50 mg, 150 mg, and 250 mg tablets. Armadafinil is a generic tablet used for improving wakefulness in adults.


Kailash Auto Finance (12.39%) was the top loser in the ‘A’ group on the BSE. The stock hit its 52-week low today. Havells (3.43%) was among the top loser in the group. Its September 2014 quarter result posted a fall in the net profit in spite of its revenue showing a growth.


Hero MotoCorp (4.03%) was the top gainer in the Sensex 30 pack. The stock hit its 52-week high today. It has informed BSE that it anticipates to clock close to 1.5 lakh in retail sales on October 21, 2014, Dhanteras, which will be a 40%-50% growth over the sales on Dhanteras day last year.


ONGC (1.97%) continued to be the top loser in the Sensex 30 stock.


US indices closed Tuesday in the green.


Sales of existing homes rose in September, hitting the fastest pace in one year and rebounding from an unexpected drop in August, the National Association of Realtors reported yesterday. The annual rate of 5.17 million was better than expected.
Except for Shanghai Composite (0.56%) all the trading Asian indices closed in the green.

 

Nikkei 225 (2.64%) was the top gainer.


European indices were trading marginally higher, while US Futures were showing mixed performance.

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