BackSebi’s DLF order cites Kotak Mahindra loans
The bank gave loans of Rs20 lakh each to 10 DLF staff whose wives bought subsidiaries' holdings in 3 firms
Premium
Mumbai: The capital market regulator’s order banning DLF Ltd and six of its top officials, including promoter and chairman K.P. Singh, from raising public funds for three years, also highlights the role of bankers, although it stops short of delivering them a well-justified rap on the knuckles.
Here’s a summary of the order by the Securities and Exchange Board of India (Sebi) that references the 2007 share sale of DLF, India’s largest property developer.
The company’s first draft red herring prospectus filed on 11 May 2006 contained information about three subsidiaries—Sudipti Estates Pvt. Ltd, Shalika Estate Developers Pvt. Ltd and Felicite Builders and Construction Pvt. Ltd.
The entire shareholding of the three companies, which were incorporated on 26 March 2006, was held by two or all three of DLF’s wholly owned subsidiaries—DLF Retail Developers Ltd, DLF Estate Developers Ltd and DLF Home Developers Ltd.
The second draft red herring prospectus, filed on 2 January 2007, did not list Sudipti, Shalika, and Felicite as subsidiaries.
In June 2007, an individual, Kimsuk Krishna Sinha, complained to Sebi saying he was cheated out of a certain amount by Sudipti Estates.
The company’s initial response was to deny that the company was a subsidiary.
Sebi, which penalized DLF for not disclosing all required information in its prospectus, seems to have concluded that Sudipti was effectively a subsidiary (even though it may have not been one technically).
Worse, it found that the wives of 10 senior executives had bought the DLF subsidiaries’ holdings in Sudipti, Felicite and Shalika, so as to make them appear unrelated to the company itself.
This happened just ahead of the initial public offering (IPO).
Where did the wives get the money to do so?
Sebi says their husbands were given personal loans by Kotak Mahindra Bank Ltd, one of the lead managers to the issue. All the loans were issued in November and December 2006.
“It is noteworthy that even the sanction of loan shows a particular pattern that same amount of loan were sanctioned and granted to each of the above mentioned KMPs (key management personnel) of DLF/employees/directors of Group Company of DLF without any apparent collaterals at the same point of time," the Sebi report said.
“Further, the receipt of said amounts and transfer thereof to Felicite show a pattern that the said amounts were transferred from the accounts of those KMPs/employees/ directors jointly held with their respective spouses and were in turn transferred to Felicite," says the Sebi order.
It’s interesting that Sebi, while choosing to penalize DLF, ignored its own finding on Kotak Mahindra Bank, which, as per the order, gave unsecured personal loans of ₹ 20 lakh each to 10 DLF employees.
A Sebi spokesperson said on Wednesday that the regulator wouldn’t be able to respond to queries on account of a public holiday in Mumbai for the Maharashtra assembly election. Mint decided to go ahead with this report because the Sebi order has been in the public domain since Monday.
Several questions remain? Why did Kotak Mahindra extend the loans? Did it know what the money was to be used for? And if it did, why did it issue a so-called certificate of due diligence on the share sale to Sebi, essentially confirming that all was kosher?
According to clause 6.11 of Sebi (Disclosure and Investor Protection) Guidelines, 2000, it is the merchant bankers’ responsibility to ensure that the prospectus includes all information and risk factors regarding “pending litigations, defaults, non-payment of statutory dues, proceedings initiated for economic offences/civil offences (including the past cases, if found guilty), any disciplinary action taken by the board/stock exchanges against the issuer company or its directors".
Kotak Mahindra officials weren’t available to comment for this story because of the holiday in Mumbai on Wednesday, a spokesperson said.
To be fair to Kotak Mahindra, it was probably, just like most other investment banks in India, hungry for the business of what was then considered a prestigious share sale.
It is common for investment banks in India to tag their name to a share sale.
DLF declined to comment on this particular issue.
“DLF and its board were guided by and acted on the advise of eminent legal advisors, merchant bankers and audit firms while formulating its Offer documents. DLF will defend itself to the fullest extent against any adverse findings and measures contained in the Order passed by Sebi," said a DLF spokesperson, reiterating what the company said on Monday.
In February 2007, Mint, in a Page 1 story, highlighted another problem with the share sale.
DLF Ltd’s business model was built around selling assets to DLF Assets Ltd (the companies had the same promoters). At the time of the issue, DLF Ltd’s topline had been dressed up with such a sale to look attractive. A closer reading of the numbers showed that this amount was still to be received (it figured under the amounts receivable head in the balance sheet).
DLF Ltd raised nearly ₹ 9,188 crore from the share sale.
Its shares were pummelled on Tuesday following Sebi’s Monday ruling.
They closed Tuesday at ₹ 104.95 each on BSE, down 28.46% from their previous close.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
