 DLF vs.

SEBI

DLF filed a draft Red Herring Prospectus with SEBI on January 2007 for raising 9187 crores
through IPO. DLF also filed the same with ROC and issued it to public on June 18,2007. The
prospectus was approved by SEBI and ROC. But there were certain transactions done by DLF
in 2006 which were not written in the Red Herring Prospectus. Mr. Sinha filed complaint with
SEBI alleging fraudulent practices by DLF group and requesting to disallow the listing of DLF
after the IPO.

SEBI investigated on the following issues:

a. Non-disclosure of material information in relation to alleged subsidiaries by DLF in

the Red Herring Prospectus.
 SEBI found that the 3 wholly owned subsidiaries of DLF – DLF Estates Limited, DLF
Housing Developer Limited and DLF Retail Limited had equity shares in Sudipti Estate
Pvt Ltd., Shalika Estate Pvt Ltd. and Felicite Pvt Ltd.
 On 29th November 2006, the entire shareholding of Felicite Pvt Ltd. held by wholly owned
subsidiary of DLF was sold to the wives of Key Managerial Personnel of DLF.
 On 30th November 2006, the wholly owned subsidiary of DLF sold their entire shareholding
in Shalika Estate Pvt Ltd.to Felicite Pvt Ltd. and on the same day sold their entire
shareholding in Sudipti Estate Pvt Ltd. to Shalika Estate Pvt Ltd.
 The wives of Key Managerial Personnel (KMP) were shareholders of Felicite until their
husbands were the KMP of DLF and when they ceased to be the KMP, the shares were
transferred to the wives of the present KMP. Hence SEBI alleged that DLF never lost
control of Sudipti, Shalika and Felicite.

b. Non-disclosure of related party transaction by DLF in the Red Herring Prospectus

c. Non-disclosure of outstanding litigation relating to alleged subsidiary of DLF as it

adversely affects the financial position of DLF.
 SEBI restrained 5 directors and the CFO of DLF from assessing the Securities Market and
prohibited them from dealing in securities for a period of three years on the ground of active
and deliberate suppression of material information to mislead and defraud the investors in
 the security market violating SEBI Act, 1992 (Sec 11), Accounting Standards – 23, DIP
Guidelines 2000, LODR and ICDR.

SAT:

The matter went to SAT where the order of SEBI was reversed observing that Mr. Sinha was
not an investor and therefore he cannot be considered as an interested party. Later on the
Control

Issue mainly concerns with the allegation that the transaction of transfer of shares was not
genuine and that the DLF continued to control the same despite disinvestment. The SAT, for
the sake of convenience, looked for the different definitions of "Control" which SEBI
considered in the impugned order.

DLF, could be said to control the three companies- Shalika, Sudipti and Felicite, only if it can
be proved that DLF had exclusive power or sole discretion to appoint or remove the Directors
of these three companies. SEBI couldn't demonstrate that DLF had such unbridled discretion.
None of the above ingredients as culled out of sections 4(1) and (2) of the Act have been
fulfilled. A holding company, after it has sold its 100% shares in a subsidiary, practically
becomes functus-officio qua the management and control of the erstwhile subsidiary.

SEBI also emphasized on the definition of "control" given in the SAST Regulations, 1997
(Takeover Code), in its order. SAT held that these regulations have no application in the context
of unlisted companies which propose to undertake an initial public offering (IPO). This act of
SEBI to shop for clauses and provisions in different statutes was considered arbitrary and thus
condemned. SAT here invoked the pari materia principle to promote uniformity and
predictability in law in order to supplement and not supplant a rule of law by another.

"Control" as given in AS-23 was also relied upon in the impugned order by SEBI. It provides
that-(a) the ownership, directly or indirectly through subsidiary(ies) of more than half of the
voting power of an enterprise; and (b) control of the composition of the board of directors so
as to obtain economic benefits from its activities. The definition makes it clear that both the
conditions need to be present for control to be established. The fact that once a policy decision
had been taken by DLF to divest all of its subsidiaries, followed by the actual divestment of its
interest in about 281 companies, there was no occasion for DLF to mention the three companies
as subsidiaries or associates as that would have been patently false statement on part of DLF.
AS-23 in its totality, deals with Accounting for Investments in Associates in Consolidated
Financial Statements. It thus defines an associate company as an enterprise in which the
investor has "significant influence". For significant influence, an investor should hold, directly
or indirectly, through subsidiaries, 20% or more of the voting power of the investee. In the
absence of a 20% shareholding, no existence of the component of "significance influence"
could be established against DLF.

Role of Merchant Banker

SAT also highlighted the importance and obligations of the Merchant Banker. It stated that DIP
Guidelines has been framed by SEBI and one of its chapter deals with the Eligibility Norms
for companies 'Issuing Securities'. Regulation in it specifically provides that a company can
bring IPO only after submission of a Draft Prospectus with the SEBI through an eligible
Merchant Banker (MB). It also mandates that the MB shall exercise due diligence by satisfying
himself about all aspects of the offering, veracity and adequacy of disclosure in the offer
documents. This liability of the MB continues even after the completion of the issue process.
In case of DLF, experts were performing the role of Merchant Banker. Not even once had they
bought up any lacuna persisting in the Disclosures made.

PFUTP Regulations, 1995

DLF was also alleged by SEBI to violate the Prohibition of Fraudulent and Unfair Trade
Practices (PFUTP) Regulations, 1995. Such regulations have been framed to prohibit
fraudulent and unfair trade practices relating to the securities market. They are a selfcontained
code and prescribe a detailed procedure for investigation of any fraudulent act by a person.
PFUTP would trigger where the Chairman, a Member or the Executive Director of SEBI has
"reasonable ground to believe" and in any manner detrimental to the investors' interest. The
due procedure established in the PFUTP Regulations has been blatantly violated by the SEBI.
SAT cited a well established by the law in a case by the Hon'ble Apex court that "...where a
power is given to do a certain thing in a certain way, the thing must be done in that way or not
at all and that other methods of performance are necessarily forbidden".

It cannot be denied that the power invoked under section 11 of SEBI Act, 1992, is in investors'
interest and the regulation of the capital market. Therefore, particularly when such a remedial
power is being used for punishing the company by debarring it from entering the capital market
for three years, Sebi, in all fairness, should have brought on record some complaint by actual
investors to the effect that they were misguided by any alleged non-disclosure/wrong
disclosure/inadequate disclosure.

SAT stated: In the economic process like IPO, not only companies but public at large are
involved. Therefore, there has to be expediency and finality in the actions of an enlightened
and reputed Regulator like Sebi. Indecisiveness, untimely and highly belated actions will only
lead to uncertainty in the minds of companies, shareholders, investors and other intermediaries
in the Capital Market.

Supreme Court upheld the decision of SEBI stating that any third party can bring complain if
it is a question of Public Interest. Relying on the principle of Golden Rule of Framing
Prospectus, the Court referred to the observation made by Justice Kindersley in the case of
New Canada Railway and held that when companies issue any document to raise capital and
investment from public at large, the disclosures must be true, honest and must not be
misleading, false or having any omission of material facts. Breach of such non-disclosures and
misrepresentations would attract civil and criminal penalties under the Companies Act and
SEBI Regulations. (Section 34, 35, 36 read with 447)

https://www.thehindubusinessline.com/companies/supreme-court-issues-notice-to-dlf-sebi-
on-non-disclosure-of-key-information-in-qip/article29204691.ece

SEBI’s key aim is to protect investors, therefore, any person with material information that
could potentially impact investor confidence and right should be allowed to initiate litigation,
here the person giving information plays the role of a whistleblower. While whistleblower
would imply illicit dealings, here the role of this third party remains merely to provide the right
authorities with the information that they might need or have overlooked to form a legitimate
case. Limiting the authority of initiating litigation only to actual investors thereby significantly
limits the scope of people who might have actual claims to protect investor rights but would be
barred simply because they are not investors themselves. While investors are a key stakeholder
of a company, many other forms of stakeholders indulge with the company daily and thereby
should be allowed to initiate proceedings if their rights have been harmed. This is because as
the shares trade in an open market, the repute of the company plays an essential role in defining
the share price, therefore, any person bringing litigation on a company is likely to harm the
company image and subsequently the share price. Thereby, if non-investors are allowed to
bring valid claims on the company, their suit can rather help the investors by informing them
of potential malice in the part of the company.
Development-

1. Laws have changed drastically for protection of investors

2. Wider powers have been given to SEBI under various regulations
3. SEBI LODR, ICDR, PIT and SAST regulations have given powers to impose
restrictions and penalty to SEBI
4. The definition of control has taken a different turn and now even material influence is
regarded as Control.