Sucheta Dalal :Class action needed to restore investor confidence
Sucheta Dalal

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Class action needed to restore investor confidence  

Jun 26, 2006

While the Indian capital market seems to be recovering from a savage correction, the mega issue of DLF Universal may have run into bigger trouble. The Securities and Exchange Board of India (Sebi) is understood to have tossed the decision of clearing its public offer to the Ministry of Company Affairs (MCA). Since the company is currently unlisted, the MCA is probably the right forum for dealing with investor complaints.


Sebi has asked the MCA to decide whether the company should be allowed to list and go ahead with what will be India’s biggest issue to raise an estimated Rs 13,600 crore by issuing 20.2 crore equity shares to the public with a two rupee face value. Since the IPO document has to come back to Sebi for its clearance, it is obvious that DLF’s listing plans have received a big setback.


Here is a look at what DLF’s minority shareholders have to say. The promoters of DLF today own 99.5% of its equity. The remaining 0.5% is held by investors who chose to stay on when DLF delisted the shares. DLF was a listed company until 2002-03, but its promoters increased their holding beyond 90%, admittedly in violation of Sebi’s Takeover Code. They admitted the lapse, paid a fine of Rs 5 lakh and made an open offer to the public at Rs 320 per share to buy out minority shareholders and went private.


Around 1,308 shareholders chose to hang on to their shares. Such shareholders invariably lose many of the privileges available to investors of listed companies, but since DLF intends to raise public money again—that too within three years of its September 2003 delisting—it cannot get away by leaving residual shareholders in the lurch.


These shareholders allege that the company made a rights issue of partially convertible debentures in a 1:1 ratio last year, but omitted to post the offer letter to 90% of the minority investors. The lucky 10% who got the letters and will profit enormously are all closely connected with the company. These debentures have since been converted into 10 equity shares each. Further, the company made a bonus issue in the ratio of 7:1 and then split the face value of shares to Rs 2 each.


Those who did not get the rights offer were thus deprived of 400 shares each against each share held on the record date. Since the promoter holding is 99.5%, it is clear they did not want to share the bonanza emanating from their massive capital restructuring exercise with the 1,308 investors who clung on to their share holding.


DLF’s vice chairman Rajiv Singh insisted to us that the Offer Letters had been posted and that investors failed to apply for debentures because they did not see value in the company. He also says that several of these investors are brokers who simply misjudged the rights offer.


But the company took care to build-in serious disincentives. The partly convertible debentures carried a 2% interest and were to be convertible anytime over the next 20 years. The letter also made the misleading claim that the company had no plans to re-list its shares on the stock exchanges. Naturally, minority shareholders have written to Sebi alleging breach of trust.


DLF’s claims about having sent the Offer Letter are also debatable since I have received several letters from genuine investors such as Kiran Parghi who holds 40 shares or Major Jasbir Singh (retd.) who are ordinary investors who have not received their offer letters.


The Midas Touch investors’ association has a different allegation. It has written to Sebi saying that DLF’s Earning Per Share (EPS) stated as Rs 12.84 is misleading and it ought to be Rs 1.32 as per Sebi guidelines.


It may well be that allegations against DLF are extra shrill because the incredible post-listing valuations reported by the media has heightened the sense of loss. Clearly, if the offers were not posted, investors have a right to demand restitution.


The speed with which the IPO has been finalised shows that listing was part of the agenda even when the rights offer was made.


Things have changed a bit since the media predicted stratospheric valuations for DLF and its Rs 60,000 crore land bank. The market is volatile and shaky and the very institutional investors who were hot on the chase of realty investments are now using their clout to beat down valuations. In a booming capital market and in the midst of a realty bubble, DLF may manage to fend off these charges and even get a clearance from the MCA, but it doesn’t bode well in the long term if the company is seen as one that does not care about its minority shareholders.


Companies such as Infosys have made millionaires out of thousands of investors, while DLF’s promoters want a place in the global rich list while depriving 1200 of its die-hard investors their claim to justifiable profits. If the company is allowed to get away with this, it would make a mockery of investor protection rules. Worse, it would encourage more companies to delist shares, restructure capital and go public again—always at the cost of minority shareholders.


Ideally, the regulators should take a leaf out of the Reserve Bank of India’s book (the RBI recently ordered Citibank to ensure that every single credit card holder who qualified under the Fly-For-Sure scheme was given the free air tickets promised to them) and force the company to compensate investors through the promoters’ substantial shareholding. Only then should the company be allowed to go public.


In fact, large institutional investors must also support such restitution by the company, instead of committing substantial investments prior to the issue. After all good corporate governance will benefit all investors over the long run.


-- Sucheta Dalal