New Delhi: Allegations made by India Against Corruption have once again brought India's largest listed real estate company DLF under public scrutiny. Many political analysts believe that Kejriwal is only attempting to embarrass Sonia Gandhi (by using Robert Vadra) and has no qualms with DLF. However, so far only DLF seems to be facing maximum heat. Questions are being raised over corporate governance practices adopted by the realty major. DLF has maintained that all its transactions with Vadra are above board. After almost a week since Kejriwal made allegations against UPA Chairperson Sonia Gandhi's son-in-law and DLF there are two transactions which still need further clarity.
DLF has expressly denied ever having given any interest free unsecured loan to Vadra or to any of his companies. There is no available evidence to question DLF's assertion as far as its Rs 65 crore dealings with M/s Skylight Hospitality is concerned. However, contrary to DLF's claim at least one unsecured loan appears to have been given to Vadra. A separate entry highlighted by Kejriwal indicates that the balance sheet of Real Earth Estates Private Limited (Vadra's firm) as at 31st March 2010 specifically shows an unsecured loan of Rs. 5 Cr from DLF Limited. There is no mention of a transaction with Real Earth Estate Pvt Ltd in the statement issued by DLF on 6th October 2012 or thereafter. Accounts of both DLF and Vadra's company have been audited by different audit firms who ought to have satisfied themselves about the nature and veracity of the transaction. It is interesting that while Vadra's auditor believes that his client has received a loan of Rs 5 crore from DLF, the auditor of the listed company believes that his client has given a "business advance". In this case there is a clear difference of understanding between DLF & Vadra and in the given circumstances only one of them can be correct.
DLF has told CNBC-TV18 that Vadra had sold 13 flats in Magnolias (a DLF project) back to the builder. DLF's Stakeholders include all its customers. The fact is that ordinarily no customer gets a refund once a property has been sold by the company. Usually a customer cannot expect that he will be able to sell his/her flat back to the company under any circumstances. However, According to Rajiv Talwar, Managing Director, DLF Magnolias has been built for a special class of clientele, customers could negotiate sale of their flats with DLF until the accommodation was transferred into their name. He also clarified that the price which the company pays for repurchase depends on market conditions and the realty major usually pays below current market valuation. However, usually the current market price is higher than the initial payment made by the buyer. This transaction still works out to be mutually beneficial for the seller (DLF) and the buyer (Vadra). It needs to be ascertained if Vadra was paid a relatively higher price in comparison to others who sold their flats to the company. Interestingly, the Competition Commission of India had found DLF guilty of abuse of dominant position on the basis of a complaint filed by Magnolia Flat Owners Association.
There is a possibility that the above transactions may finally not come in the realm of illegality and no losses may have been caused to either of the parties. Yet it may remain un-established if and what are the undue gains and who the beneficiaries are. Such dealings do raise concerns over poor corporate governance and crony capitalism. The Voluntary Corporate Governance Guidelines issued by the Ministry of Corporate Affairs do not specify any norms for dealing with customers and other stakeholders. These guidelines attempt to make, independent directors, auditors and sub-committees of board of directors, custodians of corporate governance. DLF continues to enjoy the support of these officers as is reflected from reports prepared by DLF's auditors as part of its final accounts and a media statement issued by DLF's independent directors on 9th October, 2012. While DLF's independent directors have tried to save their back by stating that they (independent directors) were always aware and involved in the matter to the extent it was required in a listed company keeping in view the interest of large number of small shareholders. However, the fact is that corporate governance goes beyond the letter of law.
Real Estate Sector certainly is not the benchmark for corporate governance. Shareholders of realty companies have not bothered about corporate governance so far. In fact firms that are politically connected have thrived. But the anti-corruption mood, and scrutiny by short seller advisories like Veritas are driving the point that realty companies that are in it for the long haul are better off being on the right side of the law. However, benevolent transactions such as those entered between DLF and Vadra seem to be part of a sector trend.
If DLF has violated corporate governance norms it is not the only one. Its misfortune is that it was associated with a high profile political target. The Competition Commission of India has noted that the absence of any single sectoral regulator to regulate the real estate sector in totality, so as to ensure adoption of transparent & ethical business practices and protect the consumers, has only made the situation in the real estate sector worse. One of the solutions to improve corporate governance practices adopted by real estate firms lies in a new land procurement policy and more convenient and transparent financing options for the sector. In addition to this the government may adopt the naming and shaming approach to improve corporate governance. For now Kejriwal's allegations have added to the pile of accusations that DLF is battling at various legal forums.
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