Digging It Out

Demolishing India?

a law suit poses a major hurdle for the real estate firm's mega stock market plan

The Delhi High Court, on February 20, 2007, converted into a Public Interest Litigation (PIL) a writ petition fi led by the Society for Consumers’ and Investors’ Protection (SCIP) against real estate major DLF Ltd. SCIP, an NGO empanelled with the Securities and Exchange Board of India (SEBI) and Ministry of Company Affairs (MCA), had received a large number of complaints from shareholders. The complaints related to the offer letter dated 21.12.2005 regarding the company’s rights issue of debentures. The shareholders said that they either did not receive the offer letter or that the terms of offer were too forbidding. The fi rst complaint was backed by an FIR lodged by the postal authorities stating that the company got letters addressed to shareholders marked with cancellation stamps in the Safdarjung Post Office but never posted the letters.

The second complaint related to the fact that the company announced that the entire issue of debentures and equity shares, if any, would not be listed at the time of issue and there was no intention of getting them listed on any stock exchange. The company offered optionally convertible unsecured debentures of face value of Rs 100 each, carrying interest at 2 per cent per annum on 1:1 right basis. The issue closed on 18.1.06.

However, on March 17, 2006-within two months of issue closure-the company convened an Extraordinary General Meeting (EGM) at which it got an in-principle approval for listing its shares on the BSE and NSE. It also converted each debenture into 10 equity shares of Rs 10 each. It declared a further bonus of seven shares for each share and split the Rs 10 share into fi ve shares of Rs 2 each.

SCIP, after approaching SEBI and Ministry of Company Affairs, fi led the writ petition and sought a direction from the court to SEBI and the ministry to probe DLF’s affairs and also to cancel the issue of debentures. Before replying to the court, and also to avert the consequences of violating SEBI rules, the Companies Act, 1956 and the Indian Penal Code, DLF convened another EGM on November 14, 2006 to modify the resolutions passed earlier. It extended benefi ts of convertible debentures issued on rights basis, their subsequent conversion into equity shares, issue of allotment of bonus shares and split of those shares to the shareholder who could not subscribe in terms of the letter of offer dated 21.12.2005.

The average cost of acquisition of these shares for the promoters is Re 0.31 per equity share, at face value of Rs 2 each, which they are offering to prospective buyers at about Rs 800. The shares are alleged to have been widely traded in the gray market at around this price. The likely offer price is hardly in sync with the fundamentals of the company with the latest EPS for Rs 2 face-value share being only Rs 2.53, and the net asset value per share being Rs 19.37.

These fundamentals have been arrived at by showing sale of properties to DLF Assets Pvt Ltd, an entity promoted by the key shareholders themselves. Profi ts for eight months ending November 30, 2006, have been shown to have increased to Rs 1,830crore from about Rs 192crore in 2005-06, an increase of 853 per cent! A Draft Red Herring Prospectus (DRHP) fi led with SEBI by DLF in January 2007 shows that 75 per cent of the company’s pre-tax profits came from sales to DLF Assets. About two-thirds of DLF’s revenue for the same period was accounted for by the same sales.

In 2002, DLF vice-chairman-cumdirector Rajiv Singh was found guilty of violating SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 for acquiring equity shares in excess of specifi ed limits without prior public announcement. Chairman KP Singh paid a fi ne of Rs 5lakh to SEBI. They got the shares de-listed on the stock exchanges and told shareholders to sell to them as they could not sell otherwise. The delisting also helped to avoid the regulator’s attention for various irregularities committed by the company.

In another case, the Supreme Court also passed an order with regard to illegal sale of shares of Bhoruka Financial Services Ltd (BFSL) to a DLF Group Company-DLF Commercial Developers (DLFCD). DLFCD entered into a share purchase agreement with the promoters of BFSL to buy out their 98.37 per cent stake and sought exemption from SEBI from making an open offer to public shareholders-numbering just 26. BFSL shares were listed on the Bangalore Stock Exchange but DLF bought the shares from promoters of BFSL on the Magadh Stock Exchange-where they were not listed but were hurriedly allowed to be traded in the permitted category through a local broker. SEBI recently slapped a fi ne of Rs 1crore for this violation.

A huge number of complaints and cases, both civil and criminal, is pending against the company and its directors. Thirty-two complaints are with the Monopolies & Restrictive Trade Practices Commission (MRTPC) while 83 complaints are before various original as well as appellate commissions, including the National Commission under the Consumer Protection Act, 1986. These complaints can leave the company facing claims worth hundreds of millions of rupees.

Over 85 criminal and civil proceedings against DLF are before the Supreme Court, various high courts and district courts. A number of arbitration proceedings are also pending. About 80 cases are with tax authorities and labour courts. About 10 criminal and civil cases are pending against DLF’s subsidiaries and their directors in various courts.

On January 2, 2007, DLF fi led the aforementioned DRHP with SEBI. It had fi led a DRHP in May 2006 but withdrew for reasons best known to it, or to SEBI and the Ministry of Company Affairs. Now, DLF intends to make a public issue of 175 million shares at face value of Rs 2 each.

If market buzz, as refl ected in the pink papers, is any indication, the issue price is likely to be Rs 800 per share. At this price, DLF will raise Rs 14,000crore, which makes it the biggest IPO of a private company in India. The only company to have raised more than Rs 10,000crore through a public issue so far is the state-controlled Oil & Natural Gas Corporation which raised Rs 10,500crore in March 2004.

Post-IPO, DLF Ltd would be a company worth over Rs 1,36,000crore and its chairman would emerge a leading billionaire-controlling more than 85 per cent of the paid-up equity share capital of the company after its listing. His wealth will be in the region of Rs 1,15,000-Rs 1,20,000crore.

Vol 1,Issue 1 | April 2007

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