The tenor of the order doesn’t match the sentence
Compared with the tenor of its order against DLF, the punishment meted out by the capital market regulator to the real estate company and its top executives is odd. If the company did in fact withhold material information on related party transactions and pending litigation in its IPO prospectus, and Sebi is convinced it did, merely banning the firm and executives from accessing the capital markets for three years can hardly be a fitting penalty. The tone of the order, issued by Sebi whole-time member Rajeev Agarwal, is certainly stern. “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 is clearly made out in this case,” he wrote. At a time when government does not vet IPO prices, disclosures are vital; to that extent, not disclosing material information is a serious violation.
In this case, according to Sebi, the company and its executives failed to disclose the transactions of three of its subsidiaries—the aim of which appears to have been to distance themselves from the entities to which they sold stakes of three other companies. Incidentally, the ultimate beneficiaries of these stakes were the wives of key management personnel of DLF—who had purchased the shares using money from joint accounts with their husbands, leading the regulator to conclude that the process of transferring the shares of its three subsidiaries was ‘through sham transactions’ and that those involved employed a “plan, scheme and device to camouflage the association of DLF with its three subsidiaries”.
In such a situation, merely stopping access to the capital markets for three years serves little purpose. The point is that many Indian business groups use a maze of companies and complex transactions to camouflage and withhold material information—parking funds or property in the names of wives is not unusual. The crime should be viewed from the perspective that such an insignificant penalty for ‘fraud and unfair trade practices’ will deter no one, and Sebi cannot hope to clean up the system this way. To be sure , Sebi’s is not the last word since the order will be appealed, but certainly the individuals involved should have been fined.