Six of the company’s senior management and directors, including its promoter, were banned for “misleading and defrauding investors” in the realtor’s 2007 initial public offering (IPO), reported Quartz.
FirstBiz reported that SEBI found three “housewives” – wives of DLF managers – to be at the core of a complex shareholding structure that was used in sham transactions that were intended to mask their husband’s and, by extension, DLF’s continued ownership of three subsidiaries, Felicite, Shalika and Sudipti.
Those three allegedly masked subsidiaries were not disclosed in the 2007 public offer documents, and thus misled SEBI.
DLF denied any wrongdoing.
SEBI member Rajiv Kumar Agarwal wrote in the order (full copy below):
In this case, I have already found that the process of share transfer of three subsidiaries of DLF in Sudipti, Shalika and Felicite was through sham transactions as alleged in the SCN and that the Noticees employed a plan, scheme, design and device to camouflage the association of DLF with its three subsidiaries namely, Felicite, Shalika and Sudipti. In this case under such plan, scheme, design and device, the Noticees suppressed several material information in the RHP/Prospectus of DLF and actively concealed the fact about filing of FIR against Sudipti and others. In the facts and circumstances of this case, 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. Therefore, the charge of violation of provisions of section 12 A(a), (b) and (c) of SEBI Act read with regulations 3 (a), (b), (c), (d) 4(1), 4(2)(f) and (k) of PFUTP Regulations against the Noticees is also established.
[…]
I am satisfied that the violations as found in this case are grave and have larger implications on the safety and integrity of the securities market. In my view, for the serious contraventions as found in the instant case, deterrent actions to safeguard the market integrity. It, therefore, becomes incumbent to deal with contraventions, digression and demeanour of the erring Noticees sternly and take appropriate actions for deterrence.
[...]
Considering the above, I, in order to protect the interest of investors and the integrity of the securities market, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11, 11A and 11B thereof and regulation 11 of the PFUTP Regulations, clause 17.1 of DIP Guidelines and regulation 111 of the ICDR Regulations hereby restrain the following entities from accessing the securities market and prohibit them from buying, selling or otherwise dealing in securities, directly or indirectly, in any manner, whatsoever, for the period of three years […]
Shardul, Janak, Somasekhar fended for DLF (Somasekhar wins for one)
Amarchand Mangaldas Delhi managing partner Shardul Shroff appeared for DLF with senior advocate Janak Dwarkadas.
Shroff, briefing senior counsel JJ Bhatt, also appeared for chairman and promoter KP Singh, his son and vice chairman Rajiv Singh and his daughter and director Pia Singh.
JSA Mumbai partner Somasekhar Sundaresan with senior associate Paras K Parekh acted for director GS Talwar and director (legal) Kameshwar Swarup.
Clarification: Talwar was exonerated by Sebi, having been given the “benefit of doubt” by Agarwal because he was a non-executive director who was only involved in high-level strategy.
SEBI was represented by its deputy general manager Pranjal Jayaswal and assistant general manager Sahil Malik.
2007’s IPO law firm (and banker) battalion
The IPO in 2007 involved a veritable who’s who of Indian and foreign legal advisers, with AZB & Partners Delhi acting as domestic counsel for the company and Luthra & Luthra Delhi as book runners’ counsel, according to the prospectus.
Amarchand Mangaldas Mumbai was listed as “special legal counsel to the issue”.
International legal counsel to DLF was White & Case London, and the underwriters relied on Linklaters in London.
Kotak Mahindra Capital Company and DSP Merrill Lynch were global coordinators and book running lead managers, while (now defunct) Lehman Brothers Securities Mumbai was senior book running lead manager.
Mumbai-based Citigroup Global Markets India, Deutsche Equities India, ICICI Securities Primary Dealership and UBS Securities India acted as book running lead managers, with a raft of other banks in various roles on the issue.
HSBC Securities and Capital Markets (India) was the financial advisor to the company.
Photo by Harsh Mangal
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Source: ET online edn., 14 Oct
Quoting veritable whos who:
Quoting White & Case:
I'm waiting for the day when these fancy suits are made Truly accountable for what they dish out, charging zillions.
Exactly the above White & Case and BZA & Partners...
Its interesting that quite a few mishaps of AMSS in cap markets are coming out and having an adverse effect on the issuers. Incidentally, the primary cause of this is that AMSS generally toe the line of the bankers as thats where they get the meat of their fees and mandate referrals. The bankers and AMSS are a cosy coterie and mask all advice under the garb of "standard practice and precedent". Its high time that they pull up their socks and be legal counsels advising on regulatory requirements. Else they are going to continue to see this trend. and the coterie's cosiness extends to all the other "cap markets firms"
it is in fact sad that after carrying out what is purported to be a sham transaction with questionable motives, the stock defence of relying on legal advice is being taken. did lawyers also advise the company people to execute this questionable transaction?
this is exactly why legal opinions keep costing more and more and include more and more caveats. because even partners of law firms know that any given day, one of their platinum clients will come back and spite their lawyers' reputation and professional competence for shady deals and violations.
However, another question to ask is whether any external lawyers ever helped DLF structure any of those alleged sham transactions, or whether they came up with them entirely in-house?
not possible.
This was deliberate omission for illegal gains.
What I am saying is that this is such a blatant red flag, that if this was not pointed out to the DLF management shows error on part of the lawyers, and if shown, but ignored by DLF shows the DLF management in poor light.
When a client does something that is blatantly wrong, its the responsibility of the lawyer to run after the client and tell him again and again that this is absolutely, totally, horrendously wrong, and will have extreme negative impact.
once that is done, then if DLF had ignored the advise, it would be DLF problem and DLF's alone.
I can bet that this red flag was not raised. or if raised not much noise was made.
why ? the only defence that comes forward is, look that was someone else's responsibility.
no sir. it was the lawyers.
The only reason they did not make noise as this was work, paper pushing at best. while billing for deep due diligence that was suppose to be done. and the consequence when things if found wrong were to be corrected.
Please don't blame this as in-house's fault.
When things go right all firms dance on rooftop saying that they are the best.
I find it ridiculous for someone to argue that now that things are wrong, its in-house counsels fault.
btw, has the inhouse counsel been fired ?
chances are nil for that.
Im just trying to give a neutral view on this. read all my comments on this thread. If lawyers are complicit, they are. And that would be sad and illegal. But just because some firms overworked their associates and made a lot of money during a boom does not automatically mean that they were not trying to do their job. being so convinced that they were at fault is just myopic.
But in truth, tell me, what document would you ask to check if some share transferee was related to someone?
What item in your requisition list or your clarificatory questions do you generally ask to avoid this situation?
why is it presumptuous ?
i find your argument that there is a documentary error that has now resulted in a massive massive financial loss to DLF and its not the fault of the lawyers, pretty wild.
Some firms overworked their associates ? well, they were charging top dollars, to precisely prevent this kind of nonsense. lawyer, espicially at the top, are paid top dollars precisely for this kind of diligence and advise.
As for your counter query, as to how will one check if the share transferee was related to someone, I would strongly suggest you read the judgment above.
There was a criminal case, an appeal in the Delhi high court and then a high court directed investigation against DLF!
so yeah, in this particular case, it was beyond doubt that the companies were sham. Even the day to day expenses of these sham companies were being taken care of by another DLF entity!
Read the judgment.
The level of legal stupidity in this case is same if not more, than the stupidity shown in the SAHARA case.
The legal provisions are cut & dry, plain & simple. You either follow them or fall foul of them.
you pay a premium legal fees to be on the right side of law.
DLF paid a premium. and got royally scammed.
First, my friend, read what I have read. I have not said there was a documentary error. Neither am I posing that as a defence.
Next, if you had read carefully, you would have realised that neither was I using overworked associates as a defence for incorrect legal advice.
Third, please try not to ask me to read the judgment. It arose out of a prolonged forensic investigation. The fund flow that you are trumpeting about is at best something that could be caught in a financial diligence. Not a legal one. If you had enough knowledge on how transactions are run, across the world, you would know that legal diligences are not the same. In practice. Or purpose. Unfortunately you dont.
Fourth, by trying to deflect my question, you have not answered my question: if you were doing the diligence, what document would you have asked for to check whether insiders and family members are the share transferees.
In substance, I find it odd that you are so keen to blame the law firms and defend the prosecuted and convicted, on the fascinating premise that these firms are reputed and making a pot of cash. Does not seem to have factual or legal basis. Not even circumstantial basis actually.
May be the law firms actively or passively helped DLF pull this off. If that very unlikely scenario emerged, of course they would be liable. But common sense suggests that their reputations in any event would be dearer to them, because that is what they bank on to generate their revenues, not scams. Legally (and factually), if DLF or its folks have pulled this stunt, irrespective of what their battery of advisors from across the world may have done, they would remain liable.
As much as I am enjoying constantly posting on this thread, I would like to move on to other stories and other things. So, next time please read before you react.
Best,
but really whether one week or not, if they had a window to catch it, they should have. but the bottom line remains that there would not have been one :)
Don't think DLF will sue these lawyers
anyway it is a company's prerogative to follow the law and not feign ignorance and pass the buck to their advisors. and in any event i think that lawyers involved would have caveated somewhere in some manner to protect their skin.
i say all this without any association with this deal; simply because the ignorance demonstrated by some people here is stupendous.
There. Fixed it for you.
Quoting Curious Cat:
THe point here is simple, did the law firms advising on the IPO actually show 'diligence' in seeking and following up on data required for the disclosures which were not made? Remember, these were the heady days of 2006-2007, when every large law firm with a good cap markets practice was doing 10 ECM deals at a time - i will not be surprised if such critical data was missed by a PQE 1-2 year associate who had no clue what he/she was doing in the transaction other than making an honest attempt to reproduce data in good English in a 500 pg offer document!
like ive tried to say elsewhere, there is no defence if lawyers were in the wrong. But just because BigLaw was involved, this holier than though attitude of shaming them seems presumptous and immature.
If DLF says it has exited these companies a year and a half before the RHP was filed, and auditors have signed off on it, no law firm is going to engage in a control test to see if there were shadow directors, board was accustomed to act etc. That is the sort you can pick up if you're doing a forensic, not in any IPO/M&A diligence.
To suggest any of the firms were actively involved in keeping it out is even more nonsensical. There are those pick-up-the-phone border line deals where law firms may skirt boundaries, but spinning companies around is legal counsel which can satisfactorily come from the GC. No law firm is ever going to let you do it and take up diligence responsibility.
Oh, by the way, was that law firm which drafted one of the Sahara companies DRHP caught out? Those zillion dollar OFCDs of Sahara never existed!!!
But yes, problem starts when a lawyer doesn't understand and just issue a title report as per wish of a company.
I have myself, drafted the report and just took the signature of a partner (law firm) and title report was ready. Now who is at fault is tough to establish because a company cant be fully 100 % satisfied with the report and for sale and offer, report will be manipulated.
In the end, its a company fault and no one else because a lawyer "advises" doesn't "order to execute".
If a company actively conceals information or confirms that the subsidiaries are held by unrelated shareholders - there is no way a lawyer can do anything to find out whether the shareholders are in fact wives of employees. This was a matter of fact and not of law.
Now I don't know when the IPO was happening or whether the law firms were aware of this structure or looked the other way (if they did it would have been because it would have been structured to be within the four corners of the black letter law even though it may have been structured to defeat the purpose of the law). As a transactional lawyer I know I have done many transactions which were in the grey zone and may have been structured to get around some regulation. That's the way the business world and corporate lawyers function.
To conclude, it wouldn't have been failure or an error on the part of the lawyers advising on the IPO. Either, the company did not disclose this transaction or this "structuring" was done with one or more legal advisors to the issue (which is a rare possibility have given that the Bookruner's legal counsel would not have cleared it even if the Company's legal counsel did).
Interesting thing about Amarchand being "Special Counsel to the Issue" - this is quite unusual. Usually there is only India Legal Counsel to the Company and India Legal Counsel to the Merchant Bankers acting as the Book running lead managers along with international legal counsel. I had heard about this for the DLF IPO which was at its time a marquee IPO. Does anyone know the gossip about why Amarchand had to be brought on as special counsel - even though L&L and AZB were advising on the issue?
I feel suitably chastised by your range of understanding on this subject , the law and deal running (not the least demonstrated by the ability to use "specious" and "coz" in the same comment). And your related powers of deduction about my identity and time utilisation patterns.
I will be more careful henceforth with my callous comments.
Remorsefully,
Prodigal Hubba
:)
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