SEBI action against DLF exposes the vulnerability of small investors

The recent action by the Securities and Exchange Board of India (SEBI) against property developer DLF and six of its promoters raises the serious question of collateral damage caused to small investors and other marginal stakeholders.

Small investors in DLF had suffered a whopping loss of ₹7,375 crore on October 14 after SEBI banned the company and its top brass from the markets for three years the day before.

The case pertains to DLF’s public issue, which hit the market in June 2007. It had lingered for seven years till the recent action by the regulator.

The promoter group holds about 74.91 per cent stake in DLF, while institutions hold 20.27 per cent and retail investors (in all 4.34 lakh individuals) 4.8 per cent.

With the fall in price of the stock to ₹105 from ₹146.7 on October 14, all shareholders have been hit, but the worst hit in such cases are the retail investors.

Small investors are those who invest up to ₹2 lakh in a scrip. Clearly, their voice gets lost in the din of the markets.

So, how has SEBI, the market regulator and the protector of investor rights, gone about protecting the rights of small investors in this case?

“It’s unfortunate that with the recent SEBI measures, it’s not only the company in question and their employees, but also small investors who have got penalised. Ideally, the regulator needs to consider these aspects, while penalising any such companies,” says Jignesh Shah, Investment Advisor of Capital Advisors, based out of Mumbai.

Arun Kejriwal, founder of advisory firm Kejriwal Research, says: “Primarily pinning the responsibility only on the promoter/key officials of a company for non-disclosure is absolutely incorrect, simply because the signing off of a document is done by the merchant banker.”

“Such a matter which pertains to an IPO should have been considered long back, as new investors who have bought shares from the secondary market are being penalised,” adds Shah.

Concurs Kejriwal: “The case in point appears to be too old a matter for such a drastic action so many years later.”

Worse, there is little for the small investors to look forward to since “the punishment given is not a capital market punishment which typically amounts to some penalty but involves damage to the company’s normal business activity,” says Kejriwal, and which will further erode the wealth of the small investors.

Though DLF shareholders were lucky enough, as the stock regained its lost ground within a month, it is naive to expect that the same will replicate in other stocks, too. Therefore, it will be prudent on SEBI’s part if it ensures major share of blame and punishment on the perpetrators rather on the entity, especially when collateral damage is large.

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