SEBI’s three year ban on DLF, its promoters and some of its employees, raises the question about whether DLF should remain in NSE's CNX Nifty index

A 3-year ban on DLF's and its promoters by the Securities and Exchange Board of India (SEBI) caused the shares to tumble 30%, which was also its 52-week low on the National Stock Exchange (NSE). SEBI barred DLF and its directors including promoter KP Singh for failure to make appropriate disclosures in its prospectus at the time of its second IPO in 2007. The order raises serious questions on the future of the real estate company, especially whether it should remain a constituent of NSE's benchmark CNX Nifty.  SEBI's long-winded investigation, which concluded only after there is a new government in Delhi is only hurting DLF investors, who are hit by collateral damage when the market regulator chose to punish the company for actions of its management and promoters. 

DLF cannot raise money from the capital markets or buy and sell shares. This could seriously affect the company's future business growth at a time when the economic is recovering. This means that shareholders will pay the price for what SEBI thinks is dubious action by the promoters, in failing to make proper disclosures. The SEBI order also does not mention the investment bankers and lead manager of the initial public offering (IPO), who sign off on the prospectus and are responsible for the accuracy of facts in the draft Red Herring Prospectus (DRHP). All this is especially strange because DLF was always a controversial company and had angered shareholders by delisting once in 2003, then seeking to re-listing again in 2007, that too by ditching nearly 1,800 investors who had stuck to their shareholding. 

The construction major in its DRHP, filed for a public issue in May 2006, had mentioned that Sudipti Estates Pvt Ltd was its associate company. The DRHP however, had been withdrawn and a fresh prospectus was filed in January 2007, in which Sudipti was not mentioned as an associate.

According to Institutional Investor Advisory Services India Ltd (IiAS), 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," the advisory firm said.

IiAS also questioned whether DLF should remain a front-line index stock? It said, "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."

This is not the first time DLF faces a controversy or regulatory action. Recently, the Competition Commission of India (CCI) penalised the company with a fine of Rs630 crore. Even earlier, it faced shareholder ire after it delisted from the exchanges in 2003, and soon followed this with a bonus.

The current action of SEBI stems from a complaint filed by a Delhi-based businessman. In 2007, Kimsuk Krishna Sinha, had alleged that DLF and its directors and agents had lured and compelled him to transfer certain plots of land and did not fulfil the promise of developing the land and providing him higher returns. Other than KP Singh, who is the executive chairman of DLF, SEBI barred Rajiv Singh, vice chairman and son of KP Singh, TC Goyal, managing director, Pia Singh, whole time director and younger daughter of the DLF chief, Kameshwar Swarup, executive director for legal, GS Talwar, director and son-in-law of KP Singh and Ramesh Sanka, chief financial officer (CFO) of DLF.

DLF closed Tuesday 28% down at Rs105.8 on the NSE, while the 50-share benchmark ended the day marginally down at 7,865.