DLF- Regulatory remiss?

DLF has always been a controversial name. Not just in the stock markets, but even out of it. They were penalised big time for drafting one sided agreements.

I recall the time they did their IPO at a fancy price in a bull market. And the market cap was huge and soon it was made part of the Sensex. The issue price was Rs.525 to the retail. Even at that time, the public was slated to hold less than 24%, with under 12% dilution through the IPO. In a way, it looked like a regulatory exemption.

Stocks that do not have the requisite free float ( or at least 25% with public) should ideally not be allowed to IPO or list. Put them on an OTC exchange and any sensible and honest Index Committee will NEVER have such a stock in any index. However, our regulators and institutions are not known for their principled stands but more for the flexibility of their spine.

Finally, after seven years, SEBI has passed an order on the IPO. In legal terms, this is an IPO that is void, “ab initio”. However, it is not feasible to trace each and every owner and make the promoter cough back the IPO price with interest. That would be ideal and would have been possible, if the action was quicker.

SEBI, in its wisdom, has penalised the shareholders of DLF. Of course, since the most shares are owned by the promoter, he loses the most in terms of notional wealth. However, the non promoter shareholder lose real money, since they have shelled out hard cash and have seen their wealth erode real time.

The three year ban on the company, denying it access to capital markets, effectively means that it cannot raise any money through a listed debt/equity or a private placement. And logically, such a ban should also mean that other sensible lenders will shy away. So unless the promoter puts in some of his personal wealth in to the company in some form or the other, the company could become extinct in three years. I could be wrong. The real estate boom could revive and DLF will make it big.

DLF will surely knock at more doors and try to get out of the noose that SEBI has given it.

The capital market regulator should have punished the promoter for the omission in the prospectus. And maybe the merchant bankers who failed in their due diligence at that point in time, should also be punished with fines totally a few times the fees they then earned and a suspension for a three year period from acting in the capital markets.

The shareholder is the one who has suffered and SEBI is making it worse for them. There should have been a huge monetary penalty on the promoter for this alleged wrong. Promoters do not need access to capital markets in so called personal capacities. They can always find out ways to come around that..

And no sympathies for the institutional investor are called for. They simply love companies that are ‘grey’ and for them neither governance nor ethics matter. If it did, I doubt if they could hold shares in more than a handful of companies. I am sure that some institutional investor will now buy more shares thinking that this fall is too steep etc.

The moral of the story? Ethics be damned. The regulator never has the interests of the investor at heart.