Coming clean on the real deal

Sucheta Dalal 14 May 2007

Last week, there was a ripple of excitement in the capital market when Sebi finally cleared the path for realty major DLF Ltd to make an initial public offering (IPO). The immediate impact was a burst of buoyancy in realty stocks. A wire agency even predicted that the DLF IPO, along with ICICI Bank’s plan to raise a whopping sum of Rs 20,000 crore, signals a revival of India’s flagging IPO market.

The next few weeks will reveal if this is true or just over-enthusiastic reporting. But one thing is sure, corporate machinations for and against DLF will remain in full swing during the run up to its IPO. If DLF’s promoters attract more than their share of controversy, it is due to a combination of their own folly and other corporates’ envy. Yet, the determination of the company to get its shares listed again makes it an issue to watch from the retail investor’s perspective.

When Sebi started talks to introduce stringent disclosure norms for realty companies (as well as mandatory IPO grading), it identified the beginning of a realty bubble in the midst of all the hype surrounding DLF’s 2006 plan to raise Rs 13,500 crore. The listing and subsequent valuation of DLF was projected to catapult KP Singh’s family to ‘the richest’ status in India.

This was easier said than done. The move trained the media spotlight on how DLF was allegedly abusing the spirit of the voluntary delisting rules in attempting a comeback at the end of the minimum cooling period of three years. The eventual price of trying to ditch 500 odd minority shareholders while restructuring its capital was a whopping Rs 1,300 crore. And after the initial attempts to deny any wrongdoing, the company probably realised the damage that would be caused by prolonged investor litigation, especially since it had the vocal support of investor groups. The settlement is remarkable, because it is the highest price that any company has ever had to pay for such investor mistreatment. Those of us involved with investor activism are fully aware that bigger blue chip companies have invariably escaped with piffling penalties for much worse than what DLF did. Let’s not forget that a three-member committee of the Sebi board had cleared Reliance Industries (before the demerger) of price manipulation based on inside information, prior to its sale of Larsen & Toubro shares to the Birla group.

DLF’s offer document will be the first important test for the IPO grading process as well as realty disclosure norms. The grading will have to evaluate the quality of disclosures on the company’s land bank as well as financials

The fact that DLF redressed the complaints of minority shareholders is a victory for investor activism. But it is commendable that DLF did not try to dodge the issue through fake appeals and endless litigation, like many Indian companies as well as multinationals have done. I have letters from several minority shareholders who have said they are satisfied with the settlement, as I imagine they should be. Of course, the counter-argument would be that DLF paid up only because its IPO would not have been cleared by Sebi otherwise. Then again, it chose to ignore advisors who were asking it to bypass the Indian market and list overseas.

Remarkably, the company seems to be calmly pressing ahead with its IPO plans with only a small change to the issue size (it will now raise Rs 11,000 crore through a 10% equity dilution), despite the fact that the RBI and Sebi have together ensured considerable cooling of the realty market through stricter financing and disclosure norms. DLF’s offer document will be closely scrutinised, especially on matters of relative recency. It will be the first important test for the IPO grading process as well as new realty disclosure norms. The grading will have to evaluate the quality of disclosures on the company’s land bank as well as financials. Those who are implacably against IPO grading will also be waiting to rubbish the process, irrespective of whether the rating is good or bad. We can also expect realty researchers to add to the confusion with strategically timed reports aimed at talking the market up or down. All these factors are bound to test the dynamism of the IPO process and investors’ ability to make a sound investment decision.

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