Mumbai: The stock market regulator on Tuesday fined a DLF group company, DLF Commercial Developers Ltd, Rs 1 crore for violating laws that govern Indian stock markets while executing a real estate deal in Bangalore in 2005.
The deal involved the purchase of 15 acres of land in Bangalore’s posh Whitefield area. The penalty comes at a time when DLF is readying to enter the capital market through an IPO. Its application for the IPO has been pending with Sebi, the capital market regulator. DLF Commercial Developers bought a company that owned the land through a series of share deals on the Magadh Stock Exchange in Patna between August 1 and August 12, 2005. The exchange operated only during those days and that too illegally as the markets regulator had not renewed its registration as a stock exchange.
DLF Commercial Developers bought nearly all shares of Bhoruka Financial Services Ltd from the latter’s promoters through a series of transactions on the exchange. BSFL had acquired 15 acres of land in Bangalore’s Whitefield in 2004 from Bhoruka Steel Ltd, a sick associate company. In order to avoid paying short-term capital gains tax and stamp duty, DLF and promoters of BSFL entered into a share transaction.
Sale of land within three years of acquisition attracts short-term capital gains tax while sale of equity shares through a registered stock exchange is subjected to short-term capital gains tax only for one year. And capital gains tax on real estate is higher than that on stock transactions. Had the DLF group company directly bought the land instead of the firm, the transaction would have been costlier.
The markets regulator, Sebi, did not find anything illegal in the deal and accepted DLF’s argument that it was meant for tax planning. However, it imposed a penalty on the firm for manipulating the stock exchange which did not have a registration with the market regulator. Amit Pradhan, the adjudicating officer of Sebi said DLF, which was coming out with “the largest IPO in the history of Indian capital markets” and the promoters of BFSL should have ensured that the “due diligence” was of “a high standard.” “Such (a) violation needs to be dealt firmly,” he said. “This is required to ensure that law of the land, especially when the defaults are in complete defiance of statutory provisions, is enforced to the maximum and a message is given to the other market players that they need to be cautious in their dealings in the securities market,” added Pradhan.