Proxy firms split on DLF Cyber City deal

DLF executives call SES rationale poor and baseless

The proposed deal between realty major DLF, its promoters and Singapore’s sovereign wealth fund GIC has elicited opposing views from proxy advisory firms. While Institutional Investor Advisory Services (IiAS) and some foreign advisory firms have recommended shareholders vote in favour of the deal, Stakeholders’ Empowerment Services (SES) has raised questions about the valuation at which promoters were sold shares in the rental arm seven years ago. DLF executives called the SES argument incorrect and baseless. 

Last month, DLF’s promoters announced the deal to sell their entire 40 per cent stake in the company’s rental arm for Rs 11,900 crore. The promoters — K P Singh and family — would sell 33.34 per cent stake in DLF Cyber City Developers Ltd (DCCDL) to GIC for Rs 8,900 crore. The remaining shares would be bought back by DCCDL for Rs 3,000 crore. 

DLF shareholders would vote on a resolution to approve of the deal on Friday.

Currently, DLF holds 100 per cent equity in DCCDL, which will be reduced to 60 per cent if the outstanding compulsorily convertible preference shares (CCPS) are converted into equity shares. However, the company has proposed 75.49 per cent of the CCPS be sold to GIC, while the rest be bought back by the DCCDL in two tranches. In the end, DLF will hold 66.66 per cent, with GIC holding the rest. Promoters have said a substantial amount of the proceeds of the sale will be utilised to clear debts of the company. 

Unlike other firms, which commented on the resolution in question, SES tried to analyse the origins of the transaction. The firm said it found the transaction of issue of CCPS to the promoters was “ab initio an abusive related party transaction” which was carried out without transparency in a subsidiary. “SES is of the view that valuation was very much in favour of promoters. Further, SES does not understand as to why and how the company has become party to the transaction. Therefore, SES recommends that the shareholders vote against the resolution,” the proxy firm said in a report. 

In its report, SES compared the promoters’ investment with the returns made by retail investors in DLF’s shares since the IPO and argued that promoters got preferential treatment. “Investment made by the promoters in DCCDL amounting to Rs 1,597 crore is presently fetching them around Rs 11,854 crore, on the other hand the retail investors of DLF have suffered in terms of the tumbling share price,” the report argued.

DLF’s shares, which were offered at Rs 525 per share in 2007, are at Rs 190 today. “If one calculates loss from IPO price they lost Rs 335 in capital. One can say that equity is subject to market risks and investors are bound to lose or gain. A perfectly correct argument. But irony is that it is in same business, promoters have multiplied their investment eight times. The counter argument can be that the promoters also lost value. But they could get themselves compensated, but not other investors,” the report said. 

In response to an email seeking comments, a DLF executive said the rationale given by SES was extremely poor. “Instead of commenting on the transaction in question, they have gone to a transaction that was approved by shareholders years ago. Their allegation that the deal was undervalued and abusive is baseless,” he said. 

The executive said that the valuation was done by reputed investment banks and was passed by shareholders after duly obtaining fairness opinion. He also referred to the positive recommendations given by other proxy advisory firms.