SAT Order in the DLF IPO Case

As readers may recall, the adequacy
of disclosures in the IPO prospectus pertaining to DLF Limited was called into
question in a series of investigations by the Securities and Exchange Board of
India (SEBI). The process culminated in SEBI passing
an order
on October 10, 2014 finding that the disclosures were inadequate
and thereby restraining DLF, its directors and CFO from buying or selling
securities or otherwise accessing the capital markets for a three-year period.
Given the high-profile nature of the case and the severity of the consequences,
it attracted a great deal of debate.
Unsurprisingly, the company, its
directors and CFO preferred an appeal to the Securities Appellate Tribunal
(SAT). On March 13, 2015, the SAT
a divided verdict on the appeal, with the majority (two out of
three members, Messrs. Jog Singh and A.S. Lamba) deciding to quash SEBI’s order
and thereby overturn the ban on the DLF, directors and CFO, and with the
minority view of Justice J.P. Devdhar upholding the ban (but with a reduced
period of six months).
The facts of the case are discussed
in a previous
. The core issue pertains to whether DLF incorrectly failed to disclose
certain companies as its subsidiaries or associate companies in its IPO
prospectus, thereby leading to a violation of the relevant disclosure norms as
well as the rules relating to fraudulent and unfair trading.
The crux of the matters relates to
certain transactions that occurred in the case of certain companies in which
DLF held shares. DLF had three wholly owned subsidiaries, viz., (i) DLF Estate
Developers Limited (DLF Estate), (ii) DLF Home Developers Limited (DLF Home),
and (iii) DLF Retail Developers Limited (DLF Retail). These three wholly owned
subsidiaries in turn incorporated three companies, viz. Sudipti Estates Private
Limited (Sudipti), Felicite Builders and Constructions Private Limited
(Felicite) and Shalika Estate Developers Private Limited (Shalika). Thereafter,
DLF Estate, DLF Home and DLF Retail transferred their shares in Shalika to
Felicite, while DLF Estate and DLF Home transferred their shares to Sudipti and
Shalika. Furthermore, the three wholly owned subsidiaries of DLF transferred
their shares in Felicite to certain women who were wives of DLF employees as
follows: DLF Estate to Mrs. Neeti Saxena; DLF Home to Mrs. Madhulika Basak; and
DLF Retail to Mrs. Padmaja Sanka. Following these transactions, Sudipti became a
subsidiary of Shalika, which in turn became a subsidiary of Felicite. The bone
of contention relates to the nature of these transactions and the appropriate
treatment regarding the disclosure of these companies in DLF’s prospectus.
The SAT followed SEBI’s approach in
categorizing the issues into three: (i) whether the set of transactions listed
above were executed through sham transactions, and whether the three companies
continued to be subsidiaries of DLF; (ii) whether the prospectus contained
material information which was true and adequate, and (iii) whether the parties
knowingly suppressed material information and facts so as to mislead and
defraud the investors in the stock market. On these issues, the majority view
of SAT found for DLF, its promoters and CFO, and the minority found for SEBI on
the substantive issues (but reduced the period for the ban in access to capital
A reading of the rather lengthy
(220-page) SAT judgment indicates that the principal question was the nature of
the transactions involving the transfer of shares of Sudipti, Felicite and
Shalika and whether they same constituted genuine transactions or sham
transaction. Both the majority and minority view lay considerable emphasis on
the first question, the outcome of which will logically lead to the conclusion
on the remaining two issues. While the SAT members placed some emphasis on the
legal principles, a large portion of the finding is based on the facts and
possible intention of the parties in effecting the transactions.
On the first question above, the
majority and minority views display considerable divergence. The majority
opinion considers each of these transactions to be legal on their own and does
not find the need to look behind them to determine their nature. It concludes
that the transactions are not indeed sham as they were carried out properly and
that the purchasers of the shares of Felicite financed their acquisitions
through proper means. It was found that these transactions were necessitated
through business means. On the other hand, the minority opinion cracks open the
shell and explores deep within to ascertain the motivations of the parties,
which are not found to be genuine in nature.
The wide gulf between the two views
is evident even from the terminology used. For example, the majority opinion
refers to the purchasers of the Felicite shares as “women entrepreneurs”
exercising their own rights, while the minority opinion (similar to SEBI)
refers to them as “housewives” (possibly suggesting they were merely holding
the shares on behalf of others (primarily DLF)). On the more substantive legal
issues, the majority opinion spends considerable time discussing the concept of
“control” under the Companies Act, 1956, the SEBI Takeover Regulations and the
relevant accounting standards and comes to the conclusion that DLF did not
exercise the requisite control over the relevant companies so as to make them
subsidiaries. Hence, the disclosures were found to be in order. On the other
hand, the minority view stresses more on the sham aspect of the transaction and
does not delve into the legalities of “control” or the definitions of
subsidiaries and associate companies, but rather find that such a discussion
would be “academic” in nature. Similarly, the majority opinion places
considerable attention on the disclosure requirements under various heads set
out in the SEBI (Disclosure and Investors Protection) Guidelines, 2000 (SEBI DIP
Guidelines), while the minority view again skirts such an individual analysis.
Approaching the issue from different points of view, the majority and minority
opinions came to divergent conclusion on the question of whether these
transactions were genuine or sham, which then laid the foundation to a logical
conclusion to be arrived at on the remaining two issues.
On the second issue, as mentioned
above, the majority view came to the conclusion that the relevant companies,
Sudipti, Felicite and Shalika need not have been disclosed in the offer
document given they were no longer subsidiaries of DLF. On the question of
whether a first-information report (FIR) filed against one of the companies by
the complainant had to be disclosed, there is some consensus between both the
majority and minority opinions that the same was not necessary. This view was
arrived at on the basis of substantive discussion as well as due to the lack of
strict compliance with procedural formalities by SEBI.
Finally, on the question of whether
there was fraud or misleading conduct under the SEBI (Fraudulent and Unfair
Trade Practices) relating to the Stock Markets Regulations, 2003, the majority
opinion found that the elements necessary to constitute “fraud” were quite
onerous and were not satisfied in the present case. However, the minority
opinion stated that even if investors were not adversely affected in the
present case, the possibility that could occur was sufficient to constitute a
violation. This was also due to the general powers available to SEBI under the
SEBI Act, 1992 to act in order to protect the interests of the investors.
Of course, this discussion is
limited to the broad themes occurring in SAT’s decision and does not delve into
the details. But, it is clear that the majority view overturns SEBI’s order and
hence exonerates DLF, its directors and CFO. The majority opinion also had
strong observations for SEBI due to considerable delays in the investigations
process and its arguably impulsive attitude that led to adverse consequences to
the company.
Given the divided nature of SAT’s
verdict and the complexity of the issues involved in the case, and the fact
that this is likely to constitute a significant precedent on matters of
disclosure in the primary markets, it is reasonable to assume the strong
likelihood of an appeal being preferred to the Supreme Court. Until then, the
SAT order would certainly be the subject matter of considerable debate in legal

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.


  • If you see the Order, in last part, PO clearly states "In view of the conflicting views in the matter, the operation of the order passed BY THE TRIBUNAL is stayed for a period of four weeks".
    This part is only signed by PO.
    The rejection of Stay by Majority clearly states
    "the prayer for stay of majority decision is, therefore, not allowed"
    So whether there is actual stay or not??

  • @Anonymous. My reading is that the majority order rejected the stay request, while the minority granted the stay. In such a scenario, the majority order prevails. Hence, there would be no stay.

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