DLF May Face Liability Upto Rs 100 Crore

India’s largest realty player DLF’s worries seem to continue. While the debt-laden company is already witnessing a negative impact of the slowdown in the economy in general and in the realty sector in particular, a new issue has raised its head. DLF recently announced that it may face a financial liability of up to Rs 100 crore for the various legal cases it is fighting across the country, mainly owing to an investigation by market regulator SEBI into insufficient disclosures during its IPO in 2007. The reports suggested that the admission is contained in a company's filing with the SEBI on April 29. DLF says the liability is based on its understanding of SEBI's laws, and legal experts believe that the money is the company's understanding of the penalty it may have to pay if found guilty by the regulator.

The issue dates back to 2007 when the DLF had hit the primary market floor. SEBI is investigating DLF for inadequate disclosures during its Rs 9,000-crore IPO in 2007. According to reports, officials with the SEBI say that their investigations are at an advanced stage and that a show-cause notice is likely to be issued to DLF in the next few weeks. On the financial impact, the DLF’s management has stated, "The potential financial liability on pending legal proceedings is 0.37% and 0.69% of our consolidated net worth and standalone net worth respectively, as of March 31, 2012”.

Apart from the SEBI case, DLF has disclosed that it faces 9 civil and 3 criminal and arbitration proceedings against it. There are 8 pending proceedings against the company under the Companies Act, 2002. There also are 9 pending criminal cases against the directors of DLF and its material subsidiaries, and 10 income-tax-related matters. DLF’s subsidiaries are also facing 9 civil cases in various courts across the country. 

The SEBI probe is related to an issue where DLF has not mentioned Sudipti Estates as its associates in RHP while it had mentioned so in its DRHP. SEBI is investigating the matter and has several ways of dealing with the case. This includes asking DLF to compensate affected investors who had subscribed to the shares in the IPO.

In the current scenario, when the scrip is already debt-ridden, any additional liability would make a negative impact on the counter. We recommend investors to avoid the counter in the short term.