Everyone loves it when a regulator acts tough against large corporations. So when the Securities and Exchange Board of India (Sebi) banned DLF Ltd and six senior officials, including its chairman and founder, it expectedly won plaudits. Shekhar Gupta, a senior journalist, tweeted, “Sahara, now DLF, Sebi stature grows…”
However, Sebi’s conduct in the DLF case has been vastly different compared with its handling of Sahara. It took more than seven years to pass its judgement. During this time, the original complainant against DLF, K.K. Sinha, was forced to take Sebi to court alleging “deliberate inaction”. Besides, the Delhi high court castigated the regulator on more than one occasion for dragging its feet on the case.
And while many have been enamoured by the ‘housewives’ plot allegedly used by DLF to hide its association with some subsidiaries, as shown in Sebi’s order, the truth is that Sinha informed the Delhi high court about this way back in September 2008.
For some perspective, Sinha first sent a complaint directly to Sebi, alleging that DLF hadn’t disclosed an ongoing litigation between him and a DLF subsidiary in its initial public offering (IPO) prospectus. Sebi’s order suggests that this complaint was forwarded to DLF for its response. The developer, obviously, denied the allegations, saying that the said company wasn’t a subsidiary.
Because of Sebi’s inaction at the time, Sinha filed a writ petition before the Delhi high court in 2007. Some of Sebi’s arguments during the hearing of this case are worth noting. Sebi objected that since the petitioner was not an investor in the securities market, he had no locus standi to file the petition. It also contended that since the subsidiary company in question was an unlisted company, it wasn’t amenable to the Sebi regulations and guidelines. Note that in the Sahara case, Sebi took the exact opposite stand, which is that it acted against an unlisted company.
Sebi didn’t exactly cover itself with glory with those statements, and the high court judge observed, “In the instant case, as the facts reveal, Sebi was inexplicably slow in reacting to the petitioner’s complaints. Its subsequent failure to initiate further steps to investigate the transaction in question was also not consistent with its statutory obligation.” In his judgement in April 2010, the judge directed Sebi to undertake an investigation into the complaints made by Sinha.
While DLF and its alleged subsidiary company filed two separate appeals against this order, a third appeal was filed by Sebi in the Delhi high court. According to a report in Firstpost.com, a division bench of the court told Sebi’s lawyer that the job of the regulator was to regulate and “not take sides” in a private matter. According to the report, chief justice Dipak Mishra said that Sebi had no business making a frivolous appeal against an earlier order of the court asking it to investigate whether DLF had indeed violated its regulations. According to Sebi’s order last week, with this judgement in July 2011, the high court disposed of the appeals and asked Sebi to examine the matter. It’s worth noting here that Sebi’s order doesn’t mention that it had itself filed an appeal against the April 2010 high court judgement. It only mentions the appeals by DLF and the subsidiary.
After the July 2011 order, Sebi appears to have pulled up its socks. Later that year, the regulator ordered an investigation into the allegations. While DLF challenged this order again, the court ruled in favour of Sebi. But again, the question remains why Sebi took so long to put out its final judgement. Much of the material it needed for its investigation was already provided by the original complainant. According to a report in The Economic Times, Sebi was asked to speed up its probe in May 2013.
Of course, Sebi did its own investigative work as well, and tied up loose ends by looking at how the sham transactions by DLF employees was funded. Besides, it rectified past mistakes by putting out a strong order against a large corporation. But in the above backdrop, that looks like a silver lining in a dark cloud, unless, of course, one has really low expectations from the regulator. The real hero in the story is evidently Sinha, who doggedly pursued the case for over seven years. Sebi, if anything, comes across as a reluctant hero.
Now, questions are being raised if the regulator will look at the role of merchant bankers to the IPO and the role they played in hiding DLF’s association with this subsidiary company, and it’s still not clear if Sebi will act against them. Its disclosure and investor protection guidelines state clearly that merchant bankers must ensure fair and true disclosure. In DLF’s case, as Mint reported last week, one of the investment bankers to the IPO was also involved in funding (through its parent company), the alleged sham transactions by DLF employees to hide DLF’s association with the subsidiary. (See: bit.ly/ZCBW9U )
Although it dithered on the DLF case, Sebi has done well to bring closure to the case (although, of course, it will now be fought at the Securities Appellate Tribunal and perhaps, even the Supreme Court). But it should go further and look at the role of investment bankers and other related issues. To stop at only Sinha’s complaint will be quite an inadequate response, considering all that its investigations have unearthed thus far.