Sebi's decision in DLF case is unusually harsh because of the collateral fallout and possible disproportionately large cost to other stakeholders, especially people who have bought houses in DLF projects.
The market watchdog has punished the promoters and other decision-makers for inadequate disclosures made in the prospectus when the company made a public offer of shares in 2007, but should corporate entity DLF have also been punished, and to the same extent?
Sebi has barred DLF, promoters KP Singh and Rajiv Singh, and four others from buying, selling or otherwise dealing in securities, directly or indirectly, in any manner, whatsoever, for the period of three years.
Treating corporate entity and the promoters/executives alike means that heavily indebted DLF that needs funds to complete ongoing projects will not have any capital market access for three years. It cannot raise equity to pare down debt or raise more loan funds. The company had a net debt of over Rs 19,000 crore at the end of June 2014.
It is conceivable that banks will also get jittery rolling over debt or increasing their exposure to the troubled company. Two sets of stakeholders will face the brunt of Sebi's decision. Minority shareholders who have bought company's stock lost over 25% of their value on Tuesday.
The bigger losers could be and those who have bought houses in around 25 under-execution DLF projects if there is delay. One can still justify shareholders' loss - they knowingly invested shares of a company, a risky asset, and have paid the price for not doing their homework.
The same cannot be said for those who bought houses from their life savings. Sure real estate is often more risky than even shares, but not everyone is a speculator. For most Indians, house is a lifetime of savings. Every corporate penal action will have some fall out on innocent bystanders or stakeholders such as suppliers, contactors, routines employees and workers, creditors and many others.
Therefore, a blanket rule that precludes corporate prosecution just because there will be collateral consequences is neither desirable nor justified. A company is a legal entity and it should be liable to action for every wrong doing. That decision, however, must consider the fact that a company's decisions are made by promoters, shareholders and managers.
Therefore, disproportionate share of blame and punishment must fall on them and not the corporate entity, especially when collateral consequences are large.
In DLF's case, the fault is more with the promoters/managers because Sebi action relates to inadequate disclosures in IPO. In fact, those who invested in the company's IPO can justifiably claim to be the aggrieved party. Yes, deterrent punishment is called for to clean up the Indian stock market where players get wind of almost every deal and promoters often treat listed public companies as their private property, but that need must also be tempered by some consideration of collateral consequences.
Could it have been that those responsible for providing misleading information in the public offer given a much harsher punishment, but the company let off with a stern warning?