DLF Ltd, which had booked 75% of its recent profit before tax by selling buildings to an entity promoted by key shareholders, has not been paid more than Rs2,200 crore, or the bulk of the sales proceeds, by that promoter-owned company DLF Assets Private Ltd, according to a revised filing with the market regulator, Securities and Exchange Board of India (Sebi).
In its filing with Sebi as part of the normal process ahead of an initial public offering (IPO) of shares, DLF noted that for the nine months ended December 2006, it sold buildings and shares in subsidiaries for Rs2,288 crore to DLF Assets and earned a profit of Rs1,839 crore, or 75%, of its total profit before tax in that period.
In the filing, however, DLF said it has received only Rs51 crore from such sales, the rest being money due from DLF Assets or classifed as loans to the promotor company. DLF Assets is a 13-month-old company owned by DLF chairman K.P. Singh, his family and associates.
In what is standard language in regulatory filings on such transactions and one that is present in filings of other real estate companies that are seeking to go public as well, the DLF filing notes that “the sale arrangements and negotiations with DAL (DLF Assets) may give rise to actual or perceived conflicts of interest... We cannot assure you that our Promoters will act to resolve any conflicts of interest in our favour or in the best interests of our minority shareholders”.
DLF declined to comment for this article. Indian stock market regulations don’t allow a company that is in the process of seeking approvals for an IPO to make public comments. There is no accounting or legal issue in terms of the validity of such transactions where one company has sold assets to another entity also owned by the promoter and not yet received payments.
Indeed, “as long as the intention is to pay back the money due, there is no bar in accounting or legal terms for such transactions”, says V. Ranganathan, a taxation expert and a senior partner at Ernst and Young, speaking in general about such practices and not commenting on the specific DLF transactions.
Because of its sheer scale and presence in India’s emerging real-estate sector, the pre-IPO filings have opened a rate window into the finances of DLF, among the country’s top landowners, much more so than other real-estate companies because the firm’s share offering is widely expected to be a significant, milestone IPO not just for the sector, but for capital markets.
Mint first reported the asset sales to DLF Assets on 5 February, based on an earlier filing that DLF made with Sebi. Capital markets observers as well as many real-estate companies themselves note that by going public, these firms are voluntarily bringing about more transparency—and heightened financial scrutiny—to an industry long perceived to be dominated by opaque transactions and ownership issues.
DLF has been waiting in the wings since January to sell shares to the public, it’s second attempt to tap money from the market in less than a year. It’s among several other real-estate firms whose draft prospectus have yet to be cleared by Sebi. As many as four others, including Purvankara Projects Ltd and Omaxe Ltd, are also yet to be given the formal go ahead.
Meanwhile, Sebi has come out with several measures to try and clamp down on real-estate firms planning to raise money by selling shares to the public. The slew of measures announced recently includes giving an estimate of land value based on the current valuation rather than future projections. The new rules also require firms to declare the actual ownership of the land banks they claim as their own. Sebi has also required all IPOs, not just from real-estate companies, to be rated by independent ratings agencies.
In its filing, DLF has classified the money it is owed by DLF Assets under two different categories. The bulk of it is set aside as loans and advances of Rs1,495 crore and the remainder, of about Rs742 crore, is set aside as money owned to it by debtors. As a result of the non-payment, the debtor amount owed to DLF has more than doubled to Rs1,457 crore in the nine months ended December. And the loans and advances given by DLF have increased to Rs4,916 crore as of December from Rs1,063.7 crore as on March 2006.
DLF, in its filing, said its total debt as on 28 February crossed Rs10,000 crore, with three-fourths of the debt being floating rate loans, or loans which are pegged to the movement of interest rates, from less than Rs4,000 crore in March 2006. Thanks to the Reserve Bank of India tightening its rates to curb money supply and inflation, interest rates in the country have been rising. It is unclear what kind of impact such a rising rates environment is having on DLF’s interest payments to its lenders. But, in its filing, DLF said it intends to borrow additional money to fund future projects.
DLF also has an outstanding payment of Rs4,440 crore towards the acquisition of land for which it has got sole development rights. In the filing, DLF said it planned to spend some of the Rs6,500 crore that it hoped to get from the sale of shares towards land acquisition and development rights.
DLF Assets, itself, was incorporated on 10 March 2006 with a share capital of Rs1 lakh, with key promoters Rajiv Singh and Kavita Singh as directors. Its three main shareholders—Kohinoor Real Estate (49%), Madhur Housing and Development Co. (30%) and Panchsheel Investment Co. (21%)—also hold more than 20% stake in DLF itself.
DLF, which was previously listed, was forced off the exchange after its promoters increased their holdings to more than 90% in violation of listing rules. It subsequently offered to buy out shares from minority shareholders, some of who declined to take up the offer.
The company’s first attempt to make an IPO, in mid-2006, had to be abandoned after these minority shareholders alleged that most of them were left out of a rights offer made by DLF in 2005, a subsequent bonus issue and a stock-split. The company finally agreed to settle with them by offering them 400 shares for every share previously held.
(Prashant Gopal contributed to this story.)