SEBI’s Order in the DLF Case: A Summary

following post is contributed by Supreme Waskar, partner at Sterling
Associates, Mumbai]
In its
order dated October 10, 2014, the Securities and Exchange Board of India
(“SEBI”) has restrained DLF Limited (“DLF”), its 5 directors and CFO
(“Noticees”) from accessing the securities market and prohibited them from
dealing in securities for the period of 3 years on the ground of active and
deliberate suppression of material information in its red herring prospectus (“RHP”)/
Prospectus so as to mislead and defraud the investors in the securities market
in connection with the issue of shares of DLF in its IPO, thereby violating the
provisions of the SEBI Act, the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP
Regulations”), the SEBI (Disclosure and Investor Protection) Guidelines, 2000
(“DIP Guidelines”) and the SEBI (Issuance of Capital and Disclosure
Requirements) Regulations, 2009 (“ICDR Regulations”).
had filed a draft RHP (“DRHP”) with SEBI in January 2007 for raising Rs. 9187.5
crore through an IPO. Thereafter, DLF issued the RHP on May 25, 2007and the
Prospectus was filed with the Registrar of Companies (“ROC”) on June 18, 2007. One
Mr. Kimsuk Sinha (“Mr. Sinha”) had filed complaints with SEBI on June
4, 2007 alleging the Sudipti Estates Private Limited (“Sudipti“) and certain other
persons had defrauded him of 34 crore in relation to a transaction between them
for purchase of land (“Complaint”) and also registered a first information
report (“FIR”) dated April 26, 2007 alleging that two of DLF’s wholly owned
subsidiaries (“WOS”) were the only shareholders of the Sudipti and requesting to disallow the listing of DLF
pursuant to the IPO and for immediate action. Subsequently the allegations in
Complaint were denied by DLF.
investigation pursuant to Delhi High Court’s order
to the inaction of SEBI in relation to Complaint against DLF, Mr. Sinha filed a
Writ Petition before the Delhi High Court (“DHC”) and the DHC vide order dated
April 9, 2010 (“Order”) issued directions to SEBI to undertake an investigation
into the aforementioned Complaints. Accordingly SEBI, vide an order
dated October 20, 2011 ordered an investigation into the allegations levied by
Mr. Sinha in his complaints to ascertain the violations, if any, of the
provisions of the DIP Guidelines read with corresponding provisions of ICDR
Regulations and the relevant provisions of the Companies Act, 1956
(“Companies Act”) and issued a Show Cause Notice (“SCN”) to the
levied by SEBI
1.   Non
disclosure of material information in relation to alleged subsidiaries by DLF
in RHP/Prospectus
At the relevant time, 3 WOS of DLF held
entire equity shares in Sudipti,
Shalika Estate Developers Private Limited (“Shalika“) and Felicite
Builders & Construction Pvt. Ltd. (“Felicite”)
. On
November 29, 2006, the entire shareholding in Felicite held by WOS of DLF was sold to 3 who were wives
of key managerial personnel (“KMPs”) of DLF. On November 30, 2006, WOS of DLF
sold their entire shareholding in Shalika
to Felicite. On the
same date, the 3 WOS of DLF sold their entire shareholding in Sudipti to Shalika. The said three “Housewives” were
shareholders of Felicite until
their respective husbands were KMPs of DLF and when they ceased to be KMPs,
shares were transferred to other KMPs’ ‘Housewives’. Further payments
even in respect of those transfers were made by the respective husbands of the
purchasers. Hence SEBI alleged that DLF never lost control of Sudipti, Shalika and Felicite
(“Alleged Subsidiaries”) and they were and are subsidiaries of DLF.
In terms of the provisions of DIP Guidelines and AS-23, certain disclosures
with respect to its subsidiaries should have been disclosed in the
RHP/Prospectus of DLF and was not disclosed. Therefore, it was held that DLF
has violated provisions of clause of the DIP Guidelines.
2.   Non-disclosure
of related party transactions by DLF in RHP/Prospectus
There was no change in the members of
board of Alleged Subsidiaries, who were also the employees of DLF and continued
to be the directors of these companies even after the aforesaid sale of
shareholding. Also there was no change in any of the authorized signatories of
the bank accounts, registered office and statutory auditors of Alleged
Subsidiaries even after the date of claimed dissociation. Hence, it was
inferred by the SEBI that DLF was in a position to control the boards and
through its employees was involved in day-to-day operations and associated with
Alleged Subsidiaries even after the date of claimed dissociation. Therefore, the
Alleged Subsidiaries were related parties of DLF in terms of AS-18. Hence, SEBI
held that DLF has failed to disclose its related party transactions.
3.   Non-disclosure of outstanding litigation
relating to Alleged Subsidiaries by DLF in
Further, the DIP Guidelines required
DLF to disclose outstanding litigation in respect of its subsidiaries or any
other litigations whose outcome could have a materially adverse effect on the
financial position of DLF. However, the RHP/Prospectus of DLF did not provide
any information of the FIR.
4.   Violations of DIP guidelines by five directors
and CFO of DLF
Since the directors and CFO of DLF had
authorised the RHP/Prospectus and signed the declarations certifying the
compliance of DIP Guidelines, SEBI held that they have failed to ensure
disclosures to be true and correct thereby violating provisions of DIP
guidelines read with ICDR regulations.
5.   Deliberate and active suppression of material
information amounting to Fraud in terms of PFUTP
In compilation of all the aforesaid
facts, SEBI held that the entire share transfer process in the Alleged
Subsidiaries was executed through sham transactions by DLF and its
associates/subsidiaries by camouflaging the association of Sudipti with
DLF as dissociation thereby failing to ensure disclosures of Alleged
DLF’s arguments before SEBI
1.      SEBI has transgressed its authority by
not limiting its investigation to Complaint as directed in Order and extended
its authority to
of DIP Guidelines, PFUTP Regulations, etc. without jurisdiction;
2.       SEBI has violated the principles of
natural justice by denying request for inspection of documents;
3.       At the relevant point of time, Mr.
Sinha was neither an investor nor a subscriber to the shares of DLF or related
to the securities market and therefore had no legitimate cause to take recourse
to the jurisdiction vested in SEBI;
4.       The RHP/Prospectus also fairly
disclosed the developmental rights in the land owned by Sudipti and the risk relating to the said development
5.       SEBI has exercised its regulatory
powers at distant point of time, which would only be   counterproductive to the interests of the
securities market and millions of investors who have invested in shares of DLF;
6.         SEBI had reviewed and issued
comments/observations on DRHP;
7.         SEBI did not allege any motive behind
the alleged acts;
8.        DLF acted in good faith on the basis of
expert advice of Merchant Bankers and legal advisors and no mala fide intent
can be imputed on them;
9.      SEBI has applied incorrect to test for determining
Alleged Subsidiaries as “related party” or “subsidiary”;
10.       There was no dealing in
securities, hence no fraud under PFUTP Regulations;
11.      No shareholding/voting
rights in or control over Alleged Subsidiaries for the purpose of holding-subsidiary
12.   SEBI has adopted an
incorrect yardstick to deduce control by relying upon the definition of
“control” under AS-23 and the SAST Regulations;
13.     FIR is neither a
litigation nor one which could affect the operations and finances of DLF, as
required to be disclosed of DIP Guidelines.
Key Conclusions in SEBI’s order
concluded that non-disclosure/omission of material information in
RHP/Prospectus makes the Issuer, its directors and CFO liable for violation of
DIP guidelines/ICDR regulations. Active and deliberate suppression of material
information in RHP/Prospectus amounts to fraud in terms PFUTP Regulations and consequently
restraining access and prohibiting dealing by Issuer, its directors and CFO in securities
DLF has filed an appeal before the Securities Appellate Tribunal (“SAT”)
against the order of SEBI which is pending.

– Supreme

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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