The Securities and Exchange Board of India (SEBI) order restraining DLF, its promoters and directors (collectively DLF), from buying, selling or otherwise dealing in securities for three years is based on ipse dixit (he said it himself) and overlooks various submissions made by DLF and is therefore flawed on many grounds. Interestingly, the initial investigation by SEBI was carried out on the complaint of an individual who was/is neither an investor nor a subscriber to DLF shares. And notably, since 2007, when DLF listed on the market, no investor to its Initial Public Offer (IPO) or other public shareholder has lodged any complaint with SEBI with regard to the veracity of the disclosures made or the same adversely affecting her interests. Even the Show Cause Notice issued by SEBI does not contain any allegations in relation to any loss suffered by any investor or any illegal advantage attributed to DLF on account of the alleged non-disclosures.
If DLF had indeed attempted to camouflage its association with certain companies which was part of a larger scheme or a sham with a view to defraud investors shouldn’t there be some pecuniary gain? Of course, if either the letter or spirit of law has been breached then gain is not required to establish breach. But shouldn’t gain play a role while deciding the punishment and would not intention play a role while computing sentence?
In brief, the background is that, an individual, Mr. Kimsuk Krishna Sinha alleged that a company, Sudipti Estates, duped him for a sum of Rs. 34 Crores. It’s Sinha’s allegation that Sudipti was a DLF group company and DLF did not reflect this in its offer documents at the time of its IPO. There were also allegations of some related party transactions which were not disclosed in the offer documents and it is also alleged that the FIR lodged by Sinha against Sudipti was not disclosed in the list of pending litigation. On the basis of these complaints, one of the principal issues to be adjudicated by SEBI was whether DLF failed to ensure that the Red Herring Prospectus/Prospectus contained the material information which is true and adequate, so as to enable investors to make an informed investment decision in the IPO. What was also in question was whether DLF actively and knowingly suppressed several material information and facts in its offer documents so as to mislead investors in securities market in connection with its share issuance.
DLF contends that Sudipti was a subsidiary at the time of filing of its first Draft Red Herring Prospectus (DRHP) but subsequently and prior to filing its second DRHP, and before Sinha lodged a complaint with SEBI, DLF altered its shareholding structure consequent to which Sudipti ceased to be a DLF subsidiary. This change in shareholding was highlighted in the second DRHP filed by DLF and hence the change was informed to SEBI. DLF contends that the shareholding structure is not a sham transaction and had been accepted by the tax authorities as a legitimate transaction. DLF further states in its defence, that if Sudipti was not its subsidiary then all other charges of non-disclosure should fail since they are premised on a holding-subsidiary relationship.
The SEBI order is premised largely on the definition of control and bases its verdict that if Sudpti and other companies were in fact controlled by DLF then they are also deemed to be owned by them. DLF defends this allegation that control does not make these entities its subsidiaries as per the definition of subsidiary under Companies Law.
All of these issues will now be examined by the Securities Appellate Tribunal (SAT) scheduled to hear DLF’s appeal later this week. And while it’s not often that SAT gives a blanket stay on SEBI orders, given how disproportionate the punishment is to the alleged offence, this is a fit case for SAT to make an exception. We all like to see the ‘big guys’ being punished. But sometimes, in the desire to see that happen we make mistakes and get carried away. That is why there is a legal phrase that “hard cases make bad law” which describes a difficult case which might cause the clarity or purity of the law to be obscured by exceptions and strained interpretations, designed to achieve a particular end. Extreme cases are a poor basis for a general law that would cover a wider range of less extreme cases. For now, the fight is far from over. And with SEBI contemplating to review the role of investment bankers and other professional advisors involved in the transaction, in some ways the fight may just be beginning. One expects that in the end the rule of law prevails, but also hopes that no precedent gets set which will be a tough act to follow.
Satvik Varma is a commercial litigator based in New Delhi.
FIRST PUBLISHED IN THE ECONOMIC TIMES ON 22ND OCTOBER 2014.