WTM/RKA/IVD-7/117-124/2014. Case: In Re: DLF Limited Vs. Securities and Exchange Board of India

Case Number:WTM/RKA/IVD-7/117-124/2014
Party Name:In Re: DLF Limited Vs
Counsel:For Noticees: T.C. Goyal, Ramesh Sanka, Janak Dwarkadas, Senior Advocate, Shardul Shroff, Advocate for K.P. Singh, Rajiv Singh, Pia Singh, J.J. Bhatt, Senior Advocate for G.S. Talwar, Kameshwar Swarup, Somasekhar Sunderasan, Advocate and Paras K. Parekh
Judges:Rajeev Kumar Agarwal, Whole Time Member
Issue:Companies Act, 1956 - Sections 4, 4(1)(a), 4(1)(b), 4(1)(c), 4(2); Securities And Exchange Board of India Act, 1992 - Sections 11, 11(1), 11(4), 11A, 11B, 12A, 12A(a), 19
Judgement Date:October 10, 2014
Court:Securities and Exchange Board of India


Rajeev Kumar Agarwal, Whole Time Member

1. DLF Limited (hereinafter referred to as "DLF") came out with an Initial Public Offer ("IPO") in the year 2007 for issuance of 17,50,00,000 equity shares of ` 2 each at a price of ` 525 per equity share aggregating to ` 9187.5 crore. In respect of the said IPO, DLF had filed its draft Red Herring Prospectus (DRHP) dated January 2, 2007 with SEBI. Before the said IPO, DLF had filed a DRHP dated May 11, 2006 ("first DRHP") which was withdrawn by DLF and subsequently it filed the second DRHP dated January 2, 2007 ("second DRHP"). SEBI issued its observations on the second DRHP on May 7, 2007. Thereafter, DLF issued the RHP dated May 25,2007. The issue opened on June 11, 2007 and closed on June 14, 2007. The Prospectus was filed with Registrar of Companies on June 18, 2007. After the completion of allotment in the IPO, the shares of DLF were listed on Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd. on July 5, 2007.

2. With regard to the above IPO of DLF, one Mr. Kimsuk Krishna Sinha ("Mr. Sinha") had filed two complaints with SEBI on June 4, 2007 and July 19, 2007. Mr. Sinha in his complaint dated June 4, 2007, inter alia, stated that Sudipti Estates Private Limited ("Sudipti") and certain other persons had duped him of ` 34 crore (approx.) in relation to a transaction between them for purchase of land, and he had registered an FIR No. 249/2007 dated April 26, 2007 at Police Station, Connaught Place, New Delhi against Sudipti, one Mr. Praveen Kumar and others in that regard. He also stated that Sudipti had only two shareholders namely, DLF Home Developers Ltd. ("DHDL") and DLF Estate Developers Ltd. ("DEDL") (both companies being the wholly owned subsidiaries of DLF) holding 5000 equity shares each. He further stated that Sudipti, DHDL and DEDL are sister concerns and are inextricably linked and these companies are a part of the DLF group. In view of the said allegations, Mr. Sinha requested that considering the imperative of safeguarding the interests of general public, the listing of DLF pursuant to the IPO be disallowed and immediate action be taken in this regard. Thereafter, vide his complaint dated July 19, 2007, Mr. Sinha had pointed out that DLF in its reply dated July 11, 2007 to him had denied its/subsidiaries' connection with Sudipti at that point of time. He further stated that DLF's claim of not having any association with Sudipti was false. Mr. Sinha in the said complaint requested SEBI to address his first complaint and immediately act thereupon.

3. The aforesaid complaints of Mr. Sinha were forwarded to DLF asking it to address the grievances raised therein. DLF sent its reply to Mr. Sinha denying the allegations leveled in the said complaints. Not being satisfied with the response provided by DLF, Mr. Sinha filed a Writ Petition No. 7976/2007 before the Hon'ble Delhi High Court. The said petition was disposed by the Hon'ble High Court vide order dated April 9, 2010 wherein the Hon'ble High Court ordered as following:

"Accordingly, a direction is issued to the SEBI to undertake an investigation into the aforementioned complaints made by the Petitioner and also the averments made in the affidavits and additional affidavits filed by the Petitioner in the instant case".

4. Against the said order dated April 9, 2010, Letters Patent Appeals were filed by Sudipti and DLF before the Hon'ble High Court and the operation of the said order was stayed by the Hon'ble High Court on July 6, 2010. Thereafter, the Letters Patent Appeals were disposed off by the Hon'ble High Court vide order dated July 21, 2011 directing SEBI to examine the matter. Pursuant to the directions of Hon'ble High Court, SEBI, vide an order dated October 20, 2011 ordered an investigation into the allegations levelled by Mr. Sinha in his complaints dated June 4, 2007 and July 19, 2007. The purpose of the investigation was to ascertain the violations, if any, of the provisions of SEBI (Disclosure and Investor Protection) Guidelines, 2000 ("DIP Guidelines") read with corresponding provisions of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations") and the relevant provisions of the Companies Act, 1956 ("Companies Act").

5. Pursuant to the investigation, SEBI issued a Show Cause Notice dated June 25, 2013 (hereinafter referred to as the "SCN") to DLF, Mr. K.P. Singh (Executive Chairman of DLF), Mr. Rajiv Singh (Vice Chairman), Mr. T.C. Goyal (Managing Director), Ms. Pia Singh (Whole Time Director), Mr. Kameshwar Swarup (Executive Director-Legal), Mr. G.S. Talwar (Director) and Mr. Ramesh Sanka (CFO). All these persons are hereinafter collectively referred to as "the Noticees" and individually by their respective names.

6. The facts and circumstances described in the SCN and the allegations leveled against the Noticees therein are, inter alia, as under:

  1. Mr. K.P. Singh, Mr. Rajiv Singh, Mr. T.C. Goyal, Ms. Pia Singh, Mr. Kameshwar Swarup, Mr. G.S. Talwar and Mr. Ramesh Sanka were part of the top management of DLF during the years 2006-07 and 2007-08.

  2. Mr. Praveen Kumar is the nephew of Mr. K.P. Singh and at the relevant time he was the director of DLF's subsidiaries viz. DEDL, DLF Land Ltd., DLF Golf Resorts Ltd., Newgen Medworld Hospitals Ltd. and Nilayam Builders & Developers Ltd. Further, he was a director of a promoter group company of DLF viz. Nachiketa Real Estates Pvt. Ltd. He was also a key management personnel (KMP) of DLF and reported to the Board of Directors of DLF.

  3. At the relevant time, DEDL, DHDL and another company named DLF Retail Developers Ltd. ("DRDL") were the subsidiaries of DLF.

  4. Sudipti and two other companies namely, Shalika Estate Developers Private Limited ("Shalika") and Felicite Builders & Construction Pvt. Ltd. ("Felicite") were incorporated on March 26, 2006. DHDL and DEDL were subscribers to the Memorandum of Association of Sudipti and they together held entire equity shares in Sudipti (50% each). The entire shareholding of Shalika, was held by DHDL (30%), DEDL (30%) and DRDL (40%). Similarly, DHDL, DEDL and DRDL were the only shareholders of Felicite and held 30%, 30% and 40% shares, respectively in it.

  5. On November 29, 2006, the entire shareholding in Felicite held by DHDL, DEDL and DRDL was sold to three persons namely, Mrs. Madhulika Basak, Mrs. Niti Saxena and Mrs. Padmaja Sanka. These three persons were wives of Mr. Surojit Basak, Mr. Joy Saxena and Mr. Ramesh Sanka, respectively who were the KMPs of DLF.

  6. On November 30, 2006, DHDL, DEDL and DRDL sold their entire shareholding in Shalika to Felicite. On the same date, DHDL and DEDL, sold their entire shareholding in Sudipti to Shalika.

  7. Pictorial Depiction of various shareholdings:

    The names of shareholders and their % age shareholding in Sudipti, Shalika and Felicite before and after the transfer of shares in these three companies are shown in the following diagram:

    Post transfer of shares, the shareholding of Sudipti, Shalika and Felicite is shown in the following diagram:

  8. Referring to the definition of 'control' under regulation 2(1)(c) the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("SAST Regulations") and Accounting Standard-23 ("AS-23") issued by the Institute of Chartered Accountants of India; and meaning of 'holding-subsidiary' under section 4 of the Companies Act, it has been alleged in the SCN that:-

    (i) Even after the sale of entire shareholding in Sudipti, Shalika and Felicite by the wholly owned subsidiaries of DLF, there was no change in the composition of the Board of directors of these three companies. The directors in Sudipti, Shalika and Felicite, who were employees of DLF, continued to be the directors of these companies even after the aforesaid sale of shareholding. These directors were subject to the control of DLF due to their 'employee and employer relationship'. Due to this set of arrangement, DLF was in a position to control the boards of these three companies. Therefore, it has been alleged that in terms of SAST Regulations, these three companies were under the control of DLF even after November 29-30, 2006 i.e. after the date of claimed dissociation. Therefore, Sudipti, Shalika and Felicite were related parties of DLF in terms of AS-18. It has been alleged that DLF has failed to disclose its related party transactions.

    (ii) The three shareholders who, pursuant to purchase of shares of Felicite from DHDL, DEDL and DRDL on November 29, 2006, became 100% shareholders of Felicite, which in turn became 100% shareholder in Shalika and which in turn became 100% shareholder in Sudipti, were spouses of KMPs of DLF. These three shareholders were not regular investors/traders in the securities market though they claimed that they purchased entire shares of Felicite for the purpose of investment in real estate sector. All the three transferees were "Housewives" and they held bank accounts jointly with their respective husbands. On this basis, it was alleged that their purchases of shares in Felicite were funded by their respective husbands' joint accounts. Considering the fact that all these three shareholders were 'Housewives' and that the payment towards their purchases of shares of Felicite were made from the joint accounts held with their respective husbands, it has been alleged that DLF never lost control of Sudipti, Shalika and Felicite.

    (iii) Even after the sale of entire shareholding in Sudipti, Shalika and Felicite by the wholly owned subsidiaries of DLF There was no change in any of the authorized signatories of the bank accounts of these three companies and Mr. Surojit Basak, husband of Mrs. Madhumita Basak and a KMP of DLF continued to be the common authorized signatory for the three companies. Further, there was no change in their registered office and Statutory Auditors.

    (iv) Shalika did not have any money of its own to purchase shares of Sudipti but the same...

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