In your interest.
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No beating about the bush.
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])
SEBI said it might issue observations on RINL’s IPO document within 30 days from the date of receipt of satisfactory reply from the lead merchant bankers to the clarification or additional information sought from them
Market regulator Securities and Exchange Board of India (SEBI) has sought clarification from the merchant banker of Rashtriya Ispat Nigam Ltd (RINL) regarding the company’s proposed initial public offering (IPO).
Without disclosing the details of clarifications sought from RINL, SEBI has said, “clarifications (are) awaited from lead manager” for the proposed public issue.
As per the latest weekly update to the processing status of draft offer documents, SEBI has said clarifications are awaited on the proposed IPO of RINL as on 17 October 2014.
However, it could not be ascertained whether the company has replied to SEBI’s queries in the meantime.
SEBI said that it might issue observations on RINL’s IPO document within 30 days from the date of receipt of satisfactory reply from the lead merchant bankers to the clarification or additional information sought from them.
The regulator had received the draft offer documents on September 19 through RINL’s lead manager UBS Securities India Private Limited.
Under the proposed IPO, the government would offload 48.9 crore shares through an offer for sale, of which 35% will be reserved for retail investors and 50% for qualified institutional buyers.
A discount of up to 5% on the Offer Price shall be offered to retail investors.
As per the draft red herring prospectus (DRHP) filed with SEBI, the government will sell its 10% stake in the company and the entire proceeds through the issue would go the exchequer.
The IPO of state-owned steel maker RINL is scheduled to hit the markets in the current fiscal, and the Cabinet has already accorded its approval for the stake sale.
The agency filed the report before Special CBI Judge Bharat Parashar and said that it contains a detailed report of investigation being carried out in the coal scam case
The Central Bureau of Investigation (CBI) on Tuesday filed a “detailed and comprehensive” revised final closure report before a special court in a coal block allocation scam case involving top industrialist Kumar Mangalam Birla, former coal secretary PC Parakh and others.
The agency filed the report before Special CBI Judge Bharat Parashar and said that it contains a detailed report of investigation being carried out in the case.
“Investigating Officer (IO) DSP KL Moses has filed a revised final report, which is stated to be detailed and comprehensive....the final report is also in the nature of a closure report. Special Public Prosecutor RS Cheema seeks some time to advance arguments...Put up for 10th November,” the judge said.
During the hearing, the investigating officer told the court that as directed earlier, that they are filing all the documents related to the case before the court.
CBI also filed certain additional documents which were seized during the investigation before the court.
During the hearing, the judge asked CBI that if he will take cognisance of the final report filed by the agency, then how it will provide the list of witnesses and documents to the court.
Responding to this, Cheema said, “Now we are taking precaution” and the agency will see that each and every document is filed in the court.
Cheema also told the court that the final revised closure report filed today deals with everything collected by the agency during the investigation.
On 12th September, the court had asked CBI as to what was the hurry in closing the case in which first information report (FIR) was registered against Birla, Parakh and others. CBI had on 28th August filed a closure report in the case.
The FIR against Birla, Parakh and others was registered in October last year by CBI which had alleged that Parakh had reversed his decision to reject coal block allocation to Hindalco within months “without any valid basis or change in circumstances” and shown “undue favours”.
The FIR relates to allocation of Talabira II and III coal blocks in 2005.
CBI had booked Birla, Parakh and other officials of Hindalco under various IPC sections, including criminal conspiracy and criminal misconduct on the part of government officials.
In its FIR, the agency had alleged that during the 25th Screening Committee meeting, chaired by Parakh, applications of Hindalco and Indal Industries were rejected for mining in Talabira II and III “citing valid reasons”.