Annals of desperate measures: How DLF used the wives of its executives to camouflage control

DLF is India's largest listed real estate company.(Reuters/Arko Datta)

The Securities Exchange Board of India (SEBI) order banning DLF, India’s largest listed real estate developer, and six of its executives from the securities markets for three years features a curious list of 10 women—the “housewives,” as the country’s market regulator terms them.

These women, all wives of senior company executives, are contended to have been utilized by the Gurgaon-headquartered real estate giant to remain in control of Sudipti Estates Private Limited, Shalika Estate Developers Private Limited and Felicite Builders and Construction Private Limited, companies at the heart of the cheating scandal the realty major finds itself embroiled in.

These are the three companies that SEBI ascertains were subsidiaries of DLF but weren’t disclosed by the developer when it went to the market in 2007 to raise Rs9,187.5 crore ($1.50 billion), then India’s biggest IPO.

Shareholding spouses

Between March and November 2006, the shareholding of the three firms—Sudipti, Shalika and Felicite—were effectively transferred from three wholly-owned DLF subsidiaries—DLF Home Developers Limited (DHDL), DLF Estate Developers Limited (DEDL) and DLF Retail Developers Limited (DRDL)—to three women.

Padmaja Sanka, Madhulika Basak and Niti Saxena, who became 100% shareholders in the three companies, were the wives of three high-ranking DLF executives. While Padmaja’s husband Ramesh Sanka was DLF’s Group CFO, Madhulika and Niti’s respective spouses, Surojit Basak and Joy Saxena, both served as senior vice president (finance) at DLF.

After the shareholding transfers were complete, Madhulika Basak and Niti Saxena held 30% each in Felicite and Padmaja Sanka, the spouse of the more senior executive, had a 40% share. Felicite, meanwhile, became 100% shareholder in Shalika, which, in turn, became a 100 shareholder in Sudipta. Effectively, the three women controlled all the three firms.

That is where DLF’s troubles begin.

“All the three transferees were ‘Housewives’ and they held bank accounts jointly with their respective husbands. On this basis, it was alleged that their purchases of shares in Felicite were funded by their respective husbands’ joint accounts,” SEBI said in its order.

“Considering the fact that all these three shareholders were ‘Housewives’ and that the payment towards their purchases of shares of Felicite were made from the joint accounts held with their respective husbands, it has been alleged that DLF never lost control of Sudipti, Shalika and Felicite,” it added.

SEBI also mentions that after the three DLF subsidiaries—DHDL, DEDL and DRDL—transferred their shareholding in Sudipti, Shalika and Felicite, there was no change in the authorized signatories of the banks of these companies, their registered addresses or their auditors.

All taken together, SEBI holds the view that “the entire share transfer process in Sudipti, Shalika and Felicite was executed through sham transactions by DLF and its associates/subsidiaries.”

DLF’s counter

The developer, in its defence, points out that SEBI hasn’t “impugned the validity” of the transfer of shares by the three subsidiaries to the three women.

Further, according to the SEBI order, DLF explained: “There is no disability in law barring a person from investing in shares merely because she is a ‘Housewife’ by profession. Nor can there be an adverse inference regarding the veracity and validity of the share acquisition by such person because the purchase consideration has been advanced from the joint account held by her and her spouse.”

Therefore, the developer argued, that just because “spouses of certain employees of DLF were shareholders of Felicite” it cannot be concluded that Felicite—and resultantly, Sudipti and Shalika—is a subsidiary of DLF.

The Rs20 lakh loans

But when SEBI started digging into the bank accounts of the three “housewives”, which they jointly held with their husbands, it discovered an unusual string of transactions.

Shortly before payments were made from Padmaja Sanka, Madhulika Basak and Niti Saxena’s bank accounts to purchase shares in Felicite, all three accounts were credit with Rs20 lakh each. These monies, according to the SEBI order, came from personal loans extended by Kotak Mahindra Bank to the the husbands: Ramesh Sanka, Surojit Basak and Joy Saxena.

These DLF employees, the order explained, then “transferred the said amounts of Rs20 lakh each to their own bank accounts jointly held with their spouses on November 28,2006, November 10, 2006 and December 16, 2006, respectively. From these bank accounts money was transferred to ICICI bank account no. [redacted] of Felicite.”

Kotak Mahindra Bank extended similar loans to seven DLF executives, and transfers of Rs20 lakh to Felicite were made from the accounts of four of these executives, according to the SEBI order.

More housewives

On December 14, 2006, Felicite allotted 200,000 shares each to 10 individuals, who were all spouses of DLF executives, employees, or directors of group companies in DLF.

Apart from the three original “housewives”—Padmaja Sanka, Madhulika Basak and Niti Saxena—who now held 10.10% each, the seven new shareholders now owned 9.5% each. These included Meenakshi Gupta, Ritu Chawla, Sangeeta Gupta, Saroj Khanna, Mukta Jindal, Nishi Goyal and Seema Sethi.

“Thus, the personal loans taken by aforesaid personnel of DLF were utilized to buy shares of Felicite in the name of their respective wives,” the order explained.

And whenever the husband of a Felicite “housewive” shareholder left DLF—as in the case of Niti Saxena and her husand, Joy—the shares in the company were transferred to another DLF subsidiary or employee’s spouse. Also, personal loans taken by the employees to help their wives buy the shares in Felicite were repaid as the executives left DLF.

Moreover, even after all these shareholding transfer took place—from DLF subsidiaries to initially three “housewives” and finally, 10 spouses—there were no changes in the board of directors of the three companies. They continued to remain employees and retainers of DLF.

“Therefore,” SEBI concluded in its order, “DLF never lost control of Felicite, Shalika and Sudipti.”

Source: http://qz.com