The Securities and Exchange Board of India (Sebi) on Monday banned India’s largest real estate developer DLF Ltd and six officials, including chairman K.P. Singh, from accessing the capital markets for three years, after finding them guilty of engaging in fraud and unfair trade practices.

A DLF spokesperson said the company was evaluating the order and will respond shortly.

An order passed by the regulator’s whole-time member Rajeev Kumar Agarwal said DLF had camouflaged its association with three subsidiaries—Felicite, Shalika and Sudipti—and material information had been suppressed in the red-herring prospectus (DRHP) of DLF, which went public in 2007.

“I find that the case of active and deliberate suppression of any material information so as to mislead and defraud the investors in the securities market in connection with the issue of shares of DLF in its IPO (initial public offering) is clearly made out in this case," Agarwal said.

In its order, Sebi said that seven entities suppressed material information in the red-herring prospectus of DLF. These seven entities include DLF, its chairman K.P. Singh, Rajiv Singh, T. C. Goyal, Pia Singh, Kameshwar Swarup and Ramesh Sanka, all of whom have been barred from dealing in the capital market for the next three years.

Sebi has penalized the entities on account of three key violations: non-disclosure of related party transactions, non-disclosure of financial details related to subsidiaries, and inadequate disclosure of outstanding litigation.

The order effectively means that while the stock can trade as usual, the company can’t approach capital markets to raise any fresh funds for three years, said Adhidev Chattopadhyay, analyst at HDFC Securities Ltd.

The issue dates back seven years. In 2007, DLF came out with an initial public offering (IPO) to issue 175 million equity shares and raised Rs9,187.5 crore.

After the IPO, Kimsuk Krishna Sinha had filed two complaints with Sebi on 4 June, 2007 and 19 July, 2007. Sinha stated in his complaint that Sudipti Estates Pvt. Ltd and certain other persons had duped him of Rs34 crore in relation to a transaction between them for purchase of land. Sinha had subsequently registered a first information report with the police in April that year in New Delhi against Sudipti, a person identified as Praveen Kumar and others in the matter.

Details of this police complaint were not revealed in the IPO prospectus by DLF.

Sebi’s order also found that DLF had misrepresented the status of some its subsidiaries. In a draft red-herring prospectus (DRHP) filed by DLF on 11 May, 2006, Sudipti, Shalika and Felicite were shown as subsidiaries of DLF. This DRHP was withdrawn on 31 August, 2006.

In a subsequent prospectus filed on 2 January 2007, DLF indicated that as a result of certain transfers of shares Sudipti, Shalika and Felicite were no longer subsidiaries of DLF. According to Sebi, this was incorrect and not disclosed even in the final prospectus.

“I find that the RHP/prospectus of DLF contained misleading disclosures with regard to the material information.... I am satisfied that the violations as found in this case are grave and have larger implications on the safety and integrity of the securities market," Agarwal said in the 43-page order.

Due to the nature of serious violations by the seven penalized entities, stern action was essential to ensure that such infractions are discouraged, Sebi said.

“This is a step in the right direction and sends across a strong signal that no matter how big a company is, it is equal before law," said J.N. Gupta, a former executive director at Sebi and founder and managing director of Mumbai-based activist shareholder advisory firm Stakeholders’ Empowerment Services Pvt. Ltd. “Everything should be disclosed so that investors feel safe in the market. If the company shows a misleading picture, then the confidence of the market will be impacted. This will also make the merchant bankers more careful in the future."

DLF shares fell 3.7% to 146.70 at the close of trading on BSE on a day the benchmark Sensex gained 0.33% to 26,384.07.

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