SEBI's Order in the DLF

Case: A Summary
By Un)akrntb Varouil October 24, 201.1 7 Min rcad Add commcnt

IThe
iollowing posl is conaibLted by SupremeWaskar pa,lferdsrerins
assoc ales Mumbat

orderdaled O.tober 10,2014,Ihe Securties ard Exchange Board of nda

( sEB J has resrrained DLF Lim ted ( DLF .) ls 5 d rccrors and
cFo
( Nollcees')from accessi.g the securjties market and
orohibited lhem fiom
dealng in seclrities ior rhe period of3 years on lhe grolnd ofacltve and
deliberale suppressof ofmate at nformarion in ts red hetring p.ospectus (,,RHp,)/
Prospectus so as lo mistead and defraud rhe inveslors in lhe securties market
in connecl or wilh the issue ofshares oi DLF I ils pO, rhereby viotating the
provisions oithe SEB Acl, the SEB| (prohibition ofFraudLtent
and U.fair
Trade Pra.tices retatiig to Securtties [larket) Reguations 2OO3l,pFUTp
Regulalions'), the SEBI (Disctosure and tnvestor protection) Guidetines 2OOO
( O P Cuidelnes') aid rhe SEB (tssuance ojCaptatand Discosure
Requnements) RegLtations. 2009 I ,tCD R Regutat ons .).

had lled a drafl RHP ( DRHp")wirh sEBt in January 2oo7 ror raising Rs. 9187.s
crore lhrough an PO. Thereafler DLF ssued the RHp on May25 tOOTand lhe
Prospeclus was fled wtrh lhe Regislra. of Conrpanies (,.ROC,) on June
18, 2007. One
Nrlr. Kimsuk sinha ( Mr. Sinha frled compainrswilh
)had SEBIon June
4,2007 aleging the sudipti Estales private Lim ted ( sudipti.) and ceria n other
persons had deirauded hlm of34 crore in retaiion lo a transacton
between them
for purchase of land ( Compla nt,) and atso registered a lirst information
report( FlR") dated Aprtl26 2OO7 aleging rhattwoof DLFs who]y owned
subsidiaries ( WOS') were lhe o.ty shareho ders oi the Sud pri and requesl.g
to disalow the

pursuantio the IPO and lorimmediare acron. S!bsequen y lhe

aieqaltons in
Cohplaint were denied by DLF.
SEBI'S
investigation pursuanltoDethi High Coun,sorder
ro the inacton of SEB|in re al on ro Comptain( aga nsl DLF,
Mr. S nha ried:
W.. PF'lo. o"io.- De,, rl.9 (or-,DrlC a o11-D.lC.,oFo.dprdo.eo
'1-
Api 9, 2010 f Ordea) issued dieclons to SEB] to undertake an
nveslioarion
,r.o r - e'o a. e1to. .o co. o ar . A (o.daqls_Bt
.d"anoroer
dated Ocrober20 2011 ordered ar investigation nio
the a[egatio.s eved by
l\rr Sinha . his compta.ts lo asceriain lhe vio ations, ir
afy ollhe
provisions ofthe Dtp Gutdernes read
wlh corespond ng provtsrofs oitCDR
Reguauons afd the reevant provrsions oi the Compan
es Act, 1956
('companies Act )and issued a show cause Nouce (.ScN.)to
the

disctosure ot natetial iiforhation in rctation ta alteged subsictiaries by DLF

in RHP/Ptospectus
411he retevant tme 3 WOS of DLF hetd
eniire eq! ryshares in Sudipti,
shatka Estate oeve opers private L miled (shatika.)and
Feticire
B!ilders & Conskuction pv,1. Ltd. (,Feticite,,). On
November2g 2006 ihe enfte sharehotd ng in Feicte
hetd by WOS of DLF was sod to 3 who

ol key mahagertat personne .KM ps ,)

( of D LF. On November 30, 2006, WOS o,
OLF
sold thereftire sha.ehotding tn Shatka
to Fe cle. On rhe
same dale, the 3 WOS ofDLF sotd rheir enrne shareholdifg
in Sudplloshatika Thesaidlhree
'Housoulves' were
sharehotders ol Fetcite unl I
then respective husbands were KMps of DLF
and whef rheyceased ro be KMps
!rire. se.- t..1re,.ed o ot ,er Ho ..er..Fr. t-
^Vor. .Le ra!op.ri.e
I roor d: o 1 e
purchase.s. Hence SEB|a eged lhar DLF
never ost controlofsudipti,sha ika afd Feictre
('Ariesed Subsidiares and iheywere
) and are substdtaries orDLE
ln terms otthe provisions of Dtp Guideines
and AS,23 cenair disctosLres
wth respectto its s!bsdartes shoutd have been drsclosed
in the
RHP/Prospeclus of DLF ard was nol discosed.
Therelore twashedihalDLF
has vio aied provis ons ol ctause 6.10.2.3 ofthe p
D Guideiines.

ofrclaled paiy tansactions by DLF in R{p/prospectus

There was no change in lhe hembers of
board olAtteged Substd aries, who were aso rhe
enrpoyees of DLF and contnued
lo belhe d reciors oJrhese companies even afte.ihe
aioresa d sale ot
sharehotdng Alsolhere was no change n anyoflhe
authorized signatories of
 the bank accounts registered office ard slalutory aldtors olA eged
Subsd ares even afte.ihe dale olclaihed d ssociatior llence ltwas
iniered bythe SEB|hat DLF was in a postion to contro ihe boards and
through ts employeeswas invoved in day-to-day operations and associated wilh
Alleged Subsdaries even aiterlhe date ofcaimed dissocialion Therefore, ihe
Aleged Subsdiarieswere realed pailesoiDLFintermsotAS 18. Hence SEB
hed lhat DLF has faied lo disclose its related parlylransactidns
3, Non-disclosurc of outstanding litigation
relaring lo Alleged Slbsidiaies by DLF in

Furlher, the D P Gudeli.es required

DLF lo dlsc ose outstanding ltgaton n respectofils subsidiares orany
other liligations whose outcome co! d have a matera Iy adverse eflect on the
flnancialposillon ofDLF However the RHP/Prospectus oIDLF did not provide
any nformation ofthe F R.
4, Violalioos ot DIP guidelines by five clitectors
S nce the dneclors a.d CFO oi DLF had
allhorsed the RHP/Prospectus and sig.ed lhe decla.ations cetfyifg the
compliance of DIP Gujde nes, SEBlheld thatthey have faled io ens!re
disclos!res to belrue and corecl therebyviolatng provisions oi DIP
glridelines read wth CDR regualons,
5. Delibeftle and active supptession ofmaterial
information ahountingtoF6ud interms of PFU|P
ln compiation of a llhe aforesald
facis, SEBlheld lhal the enfte share lransferprocess in the Aleged
Subsidiarieswas executed throuoh sham lransactions by DLF and ils
assoc ates/subs diaries by camolAaging the assocallon ol Sudipiiw th
DLFasdssoclation lherebyiai ngioensurediscosuresolALeged

DLF'S arquments before SEBI

1. SEBLhaslransgressed ts aulhorty by
noilimlrng its nveslgation lo Comp a nt as directed in Order a.d extended
its authorty io invocaiion
of D P Gllde nes, PFUTP Regu al ons elc. w thout jLrisd cuon
2. SEB hasviolaled ihe prlncip es ol
naturaliusticebydenyinq requeslforinspecto. oldocumentsl
3. At the relevanl po nl ofl me, l\4r
Sinhawas neither an nvestor.ora subscribe.io the shares ofDLF orrelated
to ihe securiiles markei and iherelore had no legitimale cause to take recours
to thejursdicron vesled in sEBl
4. The RHP/Prospeci0s also fary
dscosed the developmenla righis in lhe and owned by Sud pti and lhe rlsk
 said de!eloPmenl

5. SEB has exercised ts regulaiory

powers at distant point of time, which would or y be counterproductive to the inleresls ol

securties market a.d m I ons oi nveslors who have invested n shares of DLF|
6. SEB|had revewed and issued
commenls/obseryalons on DRHPi
7. SEB d d nol alege any mollve behlnd
lhe a leged actsl
8. DLF acted n good falth on the basis ot
expertadvice oiMe.chant Bankers and legaladvisors and.o mala rideinlent
can be impLied on themi
9. SEBIhas applied inco ecttolestfor deierm n ng
Alleged Su bsidiar es as 'relatec1 panlt ot ' subsidia| l
10. There was no dealing !r
se.urilles, hence no fraod under PFUTP Regulations;
11. No shareholdlng/vot ng
rghts in or conl@lover A eged Subs d aies lor lhe purpose of ho ding_s!bsidiary

12. SEBI has adopied ao

jncorect yardstick 1o deduce conlrol by relying upon lhe definiton of
'coni.ol'under AS-23 and ihe SAST

igal o. nor one which could aifect lhe operaions and fnances ot OLF as
requned b be disclosed ofDlP G! delnes.
Key Conclusions in SEBI's order
SEB!
corcuded lhai non d sclosure/om ssionoi maierial informalio. in
RHP/Prospectus makes lhe lssuer, its dkectors and cFo iableforvoalon of
DIP gudelines/lcDR regulations. Aclive and deliberale suppresslon oi maler a
iniormation n RHP/Prcspectus amounls lo fraud in terms P FUTP Regulations and consequent y
resrra n ng access and pfoh biung dea ing by lss!e.,lts directo.s and cFo i. securiies

DLF haslled an appealbeiore ihe Securiles Appellate Tribunal( sAT")

agalnstrhe oderofsEBlwh ch is pending.