The order of stock market regulator, Securities and Exchange Board of India (SEBI) on DLF, >banning the company and six top executives , including its founder chairman from the capital markets for a period of three years, is notable for two reasons. First, the quantum of the punishment is by far among the strongest that the market watchdog has handed out for a transgression of this kind. The real estate giant was found guilty of suppressing material information about its subsidiaries in the prospectus that it issued at the time of going public in June 2007. The company had de-subsidiarised companies that it owned through sham transactions in order to not reveal the legal cases that they were fighting over the land bank that they owned. At least three such subsidiaries were proved to have been sold to the wives of some of its top managers; these buyers were housewives and were not in business, and the company even arranged loans through a bank, which incidentally was a lead manager to the issue, in order to help them fund the share purchase. SEBI has held that despite the change in ownership — sham as it was — the subsidiaries were still managed by the same executives who managed them before the ownership changed and the authorised bank signatories were the same as were the registered office and the auditors.
The second notable aspect of the SEBI order, which DLF has >challenged in the Securities Appellate Tribuna l, is the prolonged period of time between the actual offence and the verdict now. DLF went public in 2007, and even before its offer had opened for subscription, the complainant in this case, Mr. Kimsuk Krishna Sinha, had brought the transgression to SEBI’s notice which the regulator failed to take seriously. Eventually, Mr. Sinha went to court which directed SEBI to investigate the complaint. Had SEBI acted expeditiously in the first instance, the money of thousands of small investors would have been saved. As it happened, the stock which was offered at Rs.525 a share >now trades at barely a fifth of that price . With DLF, which is saddled with Rs.19,000 crore of loans, now prevented from accessing the markets, it will be tough going for the company and its shareholders who could see a further erosion of value. It is also surprising that the regulator has overlooked the role played by merchant bankers. It is curious indeed as to how the suppression of a material fact went unnoticed in their due diligence exercise. Interestingly, even the lead manager to the issue who was found to have lent money to finance the sham transaction of de-subsidiarisation has not attracted a penalty from SEBI. Welcome as this order is, it is clear that there is still some way to go before market regulation becomes effective and timely.