Sucheta Dalal on DLF - Don't lose focus

A few months ago, 17 investor associations in one of their regular interactions with the Securities and Exchange Board of India (Sebi) passed a unanimous resolution appreciating the regulator’s tough stand on the DLF issue. That was when Sebi had refused to clear DLF’s earlier proposal to relist its shares and raise Rs 13,500 crore from the capital market.

Sebi had refused to clear the initial public offering (IPO) until the ministry of company affairs (MCA) resolved the issue of DLF’s minority shareholders. A little later, the regulator raised pertinent questions about the absurd disparity in the valuation of DLF’s land bank as well as the quality of its disclosures. In fact, Sebi told its board of directors that the runaway increase in realty valuations was triggered by DLF’s fund-raising plans and the manner in which DLF’s properties were valued. In that board meeting Sebi cleared the proposal of IPO ratings after accepting that investors do need expert help in understanding complex disclosures.

But only a part of the original investor concerns were addressed when Sebi finally cleared its revised prospectus (for the record, Sebi only offers comments on the offer document and does not specifically clear it). Investor associations which praised Sebi’s handling of DLF in the past, aren’t too happy with the regulator anymore. They are surprised that the new valuation norms applicable to DLF conveniently, do not apply to the issue nor did the IPO have to be rated.

In fact, Midas Touch Investors Association, a Sebi registered group, insists that disclosures in the DLF prospectus remain inadequate. It says that though Sebi had assured the association that the lead managers to the issue would be asked to respond to its concerns, the IPO was cleared without this happening. Specifically, it has questioned the lack of transparency about the big increase in profits through sales to group companies, it has not received any reply. If that happens to an investor association, how is an ordinary investor, whose awareness level is poor, assess a complex public offering?

One example of pitiable investor awareness is the story of DLF’s minority shareholders, who were slated to receive what can only be described as a jackpot deal after they fought for their rights. DLF’s plan to re-list its shares in 2006 was stymied after it attempted to deprive 1,100 minority shareholders (who had held on to their shares, when these were delisted approximately four years ago) the massive profits arising out of its capital restructuring. These shareholders moved court and also petitioned the regulator and the media, which forced the company to include them in the restructuring bonanza.

We now discover that barely 280 investors availed of the company’s massive debenture-to-bonus share offer that gave each minority shareholder a minimum of 31,328 share (face value Rs two) valued at a minimum of Rs 1.56 crore even before the IPO opens. If the issue trades at a premium on listing, the valuation could be significantly higher. Surely, a savvier or better-advised company would have done its homework and evaluated the cost of taking 280 minority investors along, or buying them out before the restructuring with a lucrative offer. That so many minority investors missed this bonanza again reflects poor investor awareness in India, it also shows that DLF could have avoided much of the damage to its reputation with smarter planning and an honest effort to contact its investors.

On the eve of DLF’s IPO, some of the same arrogance is on display again. It appears that DLF’s distributors and brokers are doling out as much as 3 per cent in cash kick backs to investors in their effort to lure them into subscribing. The commissions range from Rs 50 to Rs 225 per form. At the same time there is an attempt to whip up frenzy and create an active grey market in the scrip. In addition, DLF hopes to rope in more retail investors by permitting them to apply for partly paid up shares, but this too has a catch. Those who are lured by cash incentives on application forms and the option of paying only Rs 27,000 per application for shares worth Rs one lakh need to be aware that part-paid shares cannot be sold on listing.

This is important if they have funded the purchase with borrowed money. The remaining money has to be coughed up after allotment and there will be no opportunity to flip them on listing and cash in on any immediate price run up. Shouldn’t Sebi have looked closely at all these issues? Especially since it had made an example out of DLF to its own board and the company has a fairly patchy record of regulatory compliance (Sebi has penalised it for at least two other market violations besides its attempt to deprive minority investors of the benefits of capital restructuring).

Ironically enough, while DLF has a poor compliance record, it has built a fairly formidable record for the quality of its construction and its ability to deliver classy projects and modern townships, especially in and around Delhi. As the first of the mega IPOs, that are set to take away considerably liquidity from the Indian capital market, large institutional investors believe that the many sales gimmicks and incentives will indeed help the DLF IPO sail through despite what is clearly an aggressive pricing strategy.

The question is, how will retail investors, who follow the dictum of caveat emptor make up their minds? If they only go by fundamentals and also factor in the decisive slow down in the realty market, there is a good chance that they would have lost an investment opportunity. Equity investment is indeed a risky business.

Via Indian Express