There is something sinister about the proverbial tip of an iceberg. For one, its deceptive appearance makes you ignore the obvious. And then, you obviously miss the peril that lurks underneath.
So when the Delhi High Court in early-January imposed a cost of Rs 2 lakh on realty major DLF Limited while dismissing its plea against an order by market regulator, the Securities and Exchange Board of India (SEBI) to probe an allegation, it was seen as only an instance of a Delhi-based businessman being “duped” in an one-off deal. No one delved deep. In other words, no one told us the real story – about what lay underneath.
The DLF (formerly Delhi Land and Finance) group of companies is India’s largest real estate conglomerates comprising more than 30 firms. The group is headed by Kushal Pal Singh, one of India’s richest men, who according to Forbes magazine in March 2011 had an individual net worth of US $ 7.3 billion. Last year he celebrated his 80th birthday in lavish style on Jagmandir island in Pichola Lake, Udaipur, Rajasthan. Among the international celebrities present on the occasion were Colombian singer Shakira and former head of General Electric Jack Welch.
This year on January 3, Justice Vipin Sanghi of the Delhi High Court turned down DLF’s plea saying an October 2010 order of the Securities and Exchange Board of India (SEBI) against the company was “based on reasons”. DLF had sought quashing of SEBI’s order for investigation into the allegations of one Kimsuk Krishna Sinha in 2007 against it and Sudipti Estates, an associate firm of the DLF group.
Since then DLF has challenged Justice Sanghi’s order in the High Court through their lawyer former Attorney general Soli J Sorabji. And on 15 February a bench of justices S Ravindra Bhat and S P Garg had reserved judgement after the counsels for DLF, SEBI and Sinha had concluded their arguments.
The High Court, in its 61-page judgment, was categorical. It asserted that SEBI’s powers should not be restricted as it has been created to look into all issues pertaining to the working of the country’s stock exchanges and summarily dismissed DLF’s contention that the SEBI order was passed “erroneously and in blatant non-compliance with the principle of natural justice”.
The DLF petition had stemmed from a probe that SEBI had ordered into the IPO (initial public offering) of shares by the company after the High Court had asked it to look into the complaint of Sinha against DLF group and Sudipti Estates and pass an order in three months. Sinha had alleged that Sudipti and its directors/agents had “lured and compelled” him to transfer certain plots of land and did not fulfill the promise of developing the land and providing him higher returns.
The investigations were to focus on violations of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000, read with relevant provisions of the Companies Act, 1956. Sinha had alleged that Sudipti, DLF Home Developers Limited and DLF Estate Developers Limited were sister concerns inextricably linked and part of the DLF Group.
DLF maintained that Sudipti was a separate legal entity owned and controlled by different individuals. DLF in a Draft Red Herring Prospectus (DRHP), filed for a public issue in May 2006, had mentioned that Sudipti was its associate company. This DRHP, however, had been withdrawn and thereafter, it filed a fresh prospectus in January, 2007, wherein Sudipti was not mentioned as an associate.
On the face of it, this looked like an intricate web of company holdings that not many were willing to disentangle. It is, therefore, pertinent to examine the case in hand, for this appears to be an instance of land-grab taking place using loopholes in existing laws.
The Sudipti iceberg
This particular story began in May 2006 when DLF Limited (earlier known as DLF Universal Ltd) submitted a DHRP to SEBI seeking to raise Rs 9,500 crore through an IPO of shares. In October that year, roughly 50 acres of land in Bhandwari village near the Gurgaon-Faridabad road was sold by Sinha to the DLF group for Rs 34 crore though Sudipti, at that time a 100 per cent subsidiary of DLF Ltd. The agreement was that the land would be jointly developed by Sinha and the DLF group. Of the agreed amount, Sinha paid Rs 31 crore to Sudipti.
The DRHP filed on May 12, 2006 by DLF mentioned Sudipti as an associate company. It was withdrawn and a fresh DRHP filed on May 25. Even this document was withdrawn and a third filed on January 2, 2007. The latter two did not mention Sudipti. The final DRHP was processed by SEBI on May 7 and disclosed on the regulator’s website. The IPO opened for subscription on June 11 and closed on June 14, 2007.
By this time, Sinha had already taken on DLF. On April 26, 2007, he filed an FIR (first information report) at the Connaught Place police station in Delhi. The police subsequently filed a closure report which was challenged by Sinha in the Delhi HC. Sinha then filed a criminal complaint before Metropolitan Magistrate Sudesh Kumar in the Patiala House court against DLF, Sudipti and particular executives and officers of the DLF group, including Praveen Kumar, managing director, DLF Home Developers Ltd (DHDL), who happens to be the nephew of KP Singh, chairman of the DLF group.
Sinha took the matter to SEBI as well. On June 4, 2007, he informed the regulator about the dispute. SEBI replied saying his letter had been forwarded to Sudipti and DLF for their responses. It also forwarded the complaint to the merchant bankers handling the public issue. They too simply said that DLF had replied to the complainant denying his allegations. On July 11, DLF wrote to Sinha affirming that DLF had no association with Sudipti on that date. It claimed that whereas in 2006 Sudipti was controlled by two of its wholly-owned subsidiaries, DHDL and DLF Real Estate Developers Ltd (DREDL), Sudipti was no longer its associate.
However, Sinha was not willing to give up. On October 29, he filed a writ petition in the Delhi High Court against SEBI, Sudipti, DLF and other group companies. On December 18, Sinha filed an additional affidavit referring to Clause 6.11.1.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000, which require disclosure of “outstanding litigation involving the issuer company”. On the date of the disclosure of the second DHRP, May 25, 2007, an FIR stood registered against Sudipti, and the sale of the entire shareholding of DHDL and DREDL in Sudipti was a “sham transaction hurriedly executed only to avoid disclosure of the pending litigation involving SEPL (or Sudipti Estates Pvt Ltd) in the prospectus”, Sinha argued.
If matters appeared complicated, there was a reason: the web had been intricately woven on November 29 and 30, 2006. That day, DHDL and DREDL sold their shares in Sudipti to a company named Shalika Estate Developers (Pvt) Ltd, which too was controlled by DLF through three companies, DHDL, DLF Retail Developers Ltd and DLF Estates Developers Ltd. The last three companies transferred 100 percent of their shares to yet another company, Felicite Builders & Construction (Pvt) Ltd, which in turn was controlled by the wives of a clutch of senior executives of the DLF group, including Padmaja Sanka, wife of Ramesh Sanka, group chief financial officer, DLF, Madhulika Basak, wife of Surojit Basak, senior vice-president, finance, and Niti Saxena, wife of Joy Saxena, another senior vice-president, finance.
On April 9, 2010, Justice S Muralidhar of the Delhi High Court directed SEBI to investigate whether DLF had failed to disclose material information relating to Sudipti and its dispute with Sinha in its prospectus and submit a report within three months. The judge referred to Sinha’s lawyer Amit Sibal (Union Minister Kapil Sibal’s son) pointing out that the primary business of DLF was real estate development and that the parent company holds “only 0.5 percent of its land reserves” of approximately 10,000 acres while the remaining land is “held indirectly through subsidiaries and other corporate entities over which it exercises de facto control”.
SEBI had refused to entertain Sinha on the ground that his complaint was filed a day before the IPO was to close. The judge, however, turned this down and remarked: “Merely because the public issue was closed, SEBI could not be relieved of its statutory duty to conduct an enquiry into the complaint and into the veracity of the statements made in the Red Herring Prospectus.”
On May 21, SEBI wrote to the DLF company secretary asking for “details of association” and financial transactions between April 2006 and May 2010 relating to companies in the DLF group, including its associates, promoters, directors and key management personnel. SEBI also asked for details of Vikram Electric & Equipments (P) Ltd, Dominique Builders & Constructions (P) Ltd, Lysandr Builders & Developers (P) Ltd, Mudrock Builders & Developers (P) Ltd, Amandla Builders & Developers (P) Ltd, Eldoris Builders & Developers (P) Ltd and Ishayu Builders & Developers Ltd. Between July 2010 and July 2011, Sudipti, DLF and SEBI filed appeals against this order before a division bench of the High Court comprising the then Chief Justice Dipak Mishra and Justice Sanjiv Khanna. The case was then argued. The DLF group was represented by Soli Sorabjee, former Attorney-General of India.
SEBI’s counsel Neeraj Malhotra contended that relevant documents had been called for and that SEBI would investigate the allegations. Sibal said that if a promoter disassociated itself from a company, then the same had to be disclosed in the DHRP and final prospectus. SEBI should have looked into the allegations made by Sinha, since it disclosed illegal conduct, he said.
The tide began turning against DLF on July 21 2011, when the bench ruled against SEBI and the DLF group and directed SEBI to investigate the allegations. It rapped the regulatory authority by remarking that SEBI should not be supporting DLF in a private dispute. While delivering the judgment, Justice Mishra observed that as a regulator, SEBI may “ruffle the feathers” of those involved in half the disputes it had to resolve, but it had no business making a “frivolous” appeal against an earlier order of a single judge of the court directing the regulator to investigate whether DLF had indeed violated its regulations and guidelines.
The whole-time member of SEBI Prashant Saran, who examined this case on the direction of court, in his order dated October 20, observed: “Having considered the submissions and the fact that the first DRHP (filed on 12 May 2006) was withdrawn and a fresh DRHP was filed in January 2007 after the sale of stake in Sudipti, an examination is required as to whether Sudipti was dissociated for the purpose of avoiding any relevant disclosures that could arise if the entity continued to be part of the DLF group…Having prima facie observed that the company (DLF) was aware of the FIR registered against Sudipti, it is to be ascertained whether there was a duty on the part of the company to disclose the same in the prospectus.”
For the better part of it, DLF played the fool. The company argued that “the fact that Sudipti was controlled by spouses of its employees, did not lead to the conclusion that it continues to control Sudipti”. Sudipti was projected as a separate legal entity, owned and controlled by different individuals, and therefore, the liabilities of Sudipti would not have any bearing on its business. Sudipti, however, did not make an appearance during the proceedings conducted by Saran but gave a written submission.
Saran also remarked about DLF claiming that it was not aware of the FIR registered against Sudipti. He said: “The fact that an FIR was registered against Sudipti is not in dispute… Sudipti did not take a plea that it was not aware of the FIR… in all probability, Sudipti was aware of the FIR registered against it.” Saran found the argument unconvincing. He noted that the FIR clearly stated that Praveen Kumar, who represented himself as an authorised signatory/ director of Sudipti, was related to the promoters of the DLF group and was also on the board of many group companies, including DLF Estate Developers Ltd, a shareholder of Sudipti.
There was more. Sinha had said that Kumar, Jaiprakash Gaur and Pradeep Singh were among the signatories to the bank account of Sudipti and that the entire transaction (from price negotiation, payment of consideration for purchase of additional land and execution of sale deeds) with which he was involved was done by the three individuals who held positions of authority and power in many other subsidiaries/associate companies of the DLF group.
The tip of the iceberg had also been pointed out to by Sinha. In the DRHP filed in May 2006, as many as 357 companies were mentioned as associate companies of DLF Ltd. When the company filed a fresh DHRP on 2 January, 2007 only 21 companies were mentioned as associate. 336 companies, including Sudipti, had disappeared. DLF described this as an internal restructuring, but how and why financial entities should coalesce and suddenly disappear into thin air was anyone’s guess.
DLF also zoomed in on Sinha. It argued that Sinha did not have any ground to complain as he was not an investor in DLF, that he did not approach SEBI with “clean hands”, had lodged his complaint belatedly, and had mala fide motives to avoid income tax liabilities which had accrued due to short-term gains from the sale of land to Sudipti. Sinha, however, denied that DLF had sole, irrevocable and exclusive development rights on his land and submitted that the DLF had funded Sudipti, which was its wholly owned subsidiary, to purchase land using back-to-back debenture arrangements and back-to-back development agreements.
SEBI member Saran stated in his October order: “In brief, the allegation of the complainant is that the funds for the purchase of lands were provided to Sudipti by the company (DLF) in a circuitous manner, as … gathered … from the filings … made with the Registrar of Companies. His grievance is that the said information (was) not disclosed in the RHP.”
DLF decided to take this to court. On 20 November 2011, it challenged the SEBI member’s order before Justice Vipin Sanghi of the Delhi High Court. DLF lawyer Sorabjee argued that SEBI had passed its order “erroneously and in blatant non-compliance with the principles of natural justice”. He claimed that SEBI had relied on “various extraneous materials” and that its order was “contrary to the jurisdictional mandate” set in the July 22 order of the division bench of the same court. DLF’s contention was that all parties should have been given a chance by SEBI to present their respective cases simultaneously.
Sinha’s lawyers, Sibal and Priyanka Kalra, reasoned that SEBI had gone beyond the scope of the July 22 order. They said that SEBI had powers to examine anybody and investigate into the affairs of any public limited company whose shares are quoted on stock exchanges, that SEBI need not hear all parties to a dispute simultaneously at the investigation stage, and that the High Court had sought to safeguard Sinha’s interests because SEBI had not earlier been hearing his case. They argued that there was no question of violating principles of natural justice as what had been initiated by SEBI was fact-finding, preliminary investigation. Only after the investigating officer of SEBI had submitted his report, would the entire board of the regulatory authority come to a conclusion.
Appearing on behalf of SEBI, Additional Solicitor-General Parag P Tripathi said that when a regulatory body passed an administrative order to form a prime facie opinion, there was no need to provide an opportunity to other parties to be heard. SEBI was still at the state of investigation to make up its mind whether or not there had been any violation. If any incriminating material was found, all parties would be given an opportunity to present their cases, he said.
On January 3, Justice Sanghi passed a judgment that not only damned DFL, but also vindicated the original complainant Sinha. The court rejected the contention of Sudipti that SEBI had no authority to investigate its role as the firm’s shares have not been traded through the stock exchanges on which the regulator enjoys powers. “SEBI by the impugned order has directed investigation into the allegations levelled by the complainant against the petitioner about the breach of the SEBI (disclosure of Investor Protection Guidelines) 2000, read with the relevant provisions of the Companies Act, and in relation to the disclosure of information required to be made in the red herring prospectus by the petitioner-DLF,” the judge said.
Needless to say Sinha, SEBI and DLF are awaiting the order of the High Court bench with bated breath.
