Delhi Land and Finance Limited (hereon DLF) recently faced court battle with Security Exchange Board of India (hereafter SEBI) over a dispute regarding the information that DLF released in its red herring prospectus. SEBI contested that DLF retained the disclosure regarding three of its subsidiaries that SEBI said DLF had constructive control over. SEBI also alleged that DLF didn’t disclose an FIR that had been lodged against it, thereby materially hampering the future rights and current interests of its prospected shareholders. SEBI considered this a gross violation of its disclosure and investor protection (DIP) guidelines[1] as well as in violation of guidelines of the issue of capital and disclosure requirements. In light of the same SEBI banned DLF and six of its top managerial executives from accessing the capital market for three years[2]. This order came into a challenge at the Securities Appellate Tribunal which subsequently analyzed the fact situation and shed more light on the case as discussed further.

This case gives important insights into the concept of the corporate veil, the requirements of disclosure when offering shares to raise capital from the capital market, and under what circumstances and by whom a suit can be filed to challenge such release of information. There is an emphasis on setting the right standards of disclosure as DLF is one of the leading building and construction firm. Thereby this case sets an important precedent for a very substantial industrial and corporate culture.

Facts of the Case

The key contention of this case lies in the lack of disclosure of the alleged ownership of three subsidiaries, in its red herring prospectus. The three wholly-owned subsidiaries, which further incorporated three more companies, Sudipti Estates Private limited, Felicite Builders and Constructions Private Limited and Shalika Estate Developers. A few days before DLF filed the second draft Red herring Prospectus with SEBI, the shares of these subseries were altered in a manner that as of 30th November 2006, Felicite became the holding company of both the other companies and the shares of Felicite builders and construction Pvt. Ltd were held by the spouses of some members of the top-level management at DLF. Thereby, DLF on paper lost all control over these subsidiaries and thereby had no apparent need to disclose them in a prospectus for its company whatsoever[3]. This transaction was declared to be a ‘sham’ by SEBI as it contended that DLF still had full control over the said subsidiaries, as DLF still had sufficiently proximity with them.  SEBI replied the second draft of the prospectus to DLF with some alterations with regards to its content, however, no comments were made concerning declaring the change in the ownership status of, or any information related to the subsidiaries in question. DLF complied with said alterations and comments before offering the proposal to the general public. On July 5th, 2007, the red herring prospectus was listed on the BSE and NSE by the Registrar of companies along with the final prospectus approved by SEBI open for public subscription.

The case came into notice by SEBI, when Mr Kimsuk Sinha filed a case with it against one of these subsidiaries, claiming that the company had defrauded him of Rs.35,00,00,000. The fraud was concerning an oral contract for commencement of a development project that Sudipti didn’t come through on. On this complaint SEBI ordered a ‘show cause notice’ to DLF, leading to the following discoveries and orders thereof.

DLF being the judgement debtor reached out to the Securities Appellate Tribunal to get an injunction and possibly reverse the order that barred DLF and its top-level management for accessing the capital market for three years.

The key question that the tribunal considered was if Mr Sinha formed a necessary and proper party to the appeal filed by DLF[4], and in the process also deliberated on the following questions,

  • If the transactions were done with the intention to defraud, and if DLF had any actual association that gave it reasonable control over the subsidiaries.
  • Was the information on the red herring prospectus complete for the investors to make an informed decision on the IPO or should DLF have included these subsidiaries and the FIR in its prospectus. Do these FIR and subsidiaries materially affect the IPO?
  • Whether the directors held the knowledge of said transactions, and voluntarily suppressed such information before the IPO, thereby intending to defraud the investors.

While the tribunal deliberated on these questions, this paper would slightly deviate from the tribunal and understand the various theoretical frameworks that came into question in this case and how effectively had they been implemented in the case at hand, going beyond just the question of necessary and proper parties and highlighting the under light precedents that this case further set forth.

1. What is the requirement of the lifting of the corporate veil, and should it have been lifted in the following case?

2. What is the disclosure requirement and should DLF have disclosed these subsidiaries?

3. What constitutes proper parties, why only limit them to shareholders?

Issue 1

Piercing of the corporate veil is a situation in which the court sets aside the limited liability in a company to make the investors or the directors personally liable to any fraudulent act committed[5]. The authority of the courts to hold the directors and investors personally liable must be used with utmost discretion as it requires hampering with an essential feature of a company, which is a separate legal entity and limited liability. Maintaining this high bar is essential to keep stability and security in the company format of a business. However, in its understanding the company is a mere personification of the acts that are committed by its directors, thus acts that are done with ill intention must not be given the blanket immunity of them being done by the company. In the case at hand, it is seen that some of the key managerial positions were aware of the transactions that had taken place. Although the tribunal argued for DLF saying that information with a relative cannot be equated to information with oneself, it can be inferred that the directors were, in fact, aware of this change in ownership, given the cultural backdrop of India. The patriarchal nature of the society gives husbands reasonable control over their wives, in which case evading liability on the technical definition of key managerial personnel seems unreasonable. As a holding company in which the wife is a primary shareholder, the husband becomes a very important stakeholder. Therefore, constructive knowledge can be assumed onto the directors and reasonable control can be inferred on them. This gave the directors of the company sufficient control over the companies even though they didn’t have any shareholding in them. The tribunal, in this case, stuck to the book definition of who comprised key managerial personnel, which excluded spouses from the purview of this definition. This mechanical reading of the law allowed for a very restricted understanding of the law itself. While the law does not restrict anyone from buying the shares of any company, in the following case the spouses had been given full control of the companies just days before the IPO. The shareholding was transferred in a manner that skillfully evaded any liability that could have been mounted on the managerial personnel themselves as they were operating through their wives.

Based on the reasonable assumption it can be granted that there is a strong likelihood that there might have been malafide intention on the parts of the managerial authority, while they could have been granted the benefit of the doubt in some areas, a blanket immunity seems to be granted in this case. Where the courts refused to look at the case facts beyond the strict letter of the law, which is not the most ideal application of the law.

This gave the directors reasonable control over these subsidiaries, even though they had no on paper control over them. Their control was exercised via their wife(s). In which case both knowledge and control of these subsidiaries could be inferred on the top-level management of DLF. It was also seen in the case of State of UP v Renusagar Power Co[6], in the following case the electricity generated by a wholly-owned subsidiary was considered to be the same as the electricity generated by the parent company and the corporate veil was lifted.  Although in the case of DLF the subsidiaries lost their technical status of being wholly owned by DLF, they could have been interpreted to be under reasonable control of DLF as they were owned by the wives of DLF’s top management. SEBI further emphasized on this stance by claiming that DLF did have full control over these subsidiaries and their actions[7]. Thus, if the court looked beyond the strict letter of the law, they might have had sufficient locus to pierce the corporate veil and hold the managers personally responsible for the transactions that had been made via these subsidiary companies.

Issue 2

The second contention that must be looked at the need for disclosure that must be done in their red herring prospectus. As was mentioned by the tribunal, the information had no substantial effect on the share price and thereby did not affect the investors. However, the non-disclosure of the same impacts their interests in having full knowledge of the company that they are investing in. DLF had given a surface disclosure in its second draft that was subsequently omitted in the final documents. While DLF claimed that these companies were in no control of the companies, it has been observed that the transfer of shares might not have been done with clean hands, thus, the shareholders must be made aware of these transactions. Adding to the fact that the company had already been subjected to an FIR for a 35 crore claim on the undisclosed subsidiary. If the FIR did prove merit and was subsequently admitted to court, the cause of action had arisen before the red herring proposal and therefore DLF must provide some prima facie disclosure to its potential investors.

Given that DLF had left all on paper control of the company they did not require any form of disclosure. This could also be because DLF might have forecasted that the FIR might result in potential damage to their IPO and to evade the same they changed the ownership of the company, but this is a mere assumption that might prove ill intention in the lack of disclosure on part of DLF. It is important to note that since the formal charge sheet and proceedings hadn’t been initiated, mere FIRs don’t require disclosure. However, in the following case, the FIRs are part of the constructive non-disclosure that DLF opted into by the means of changing the ownership and directorship of these companies.

Issue 3

This issue becomes of importance when the tribunal noticed that the person (Mr Kimsuk) that started the case alongside SEBI wasn’t a subscriber of DLF’s shares and therefore could not be constituted as a proper party. The tribunal observed that SEBI was meant to protect the rights and interests of investors, and therefore only an investor could have initiated a proceeding against DLF once their rights had been violated. This shows the flaw in the tribunals approaches to protect the rights of the investors. The tribunal affirms that there must be some apparent loss before any remedy could be sought by the investor. In this case, we see that although the person does not subscribe to DLF’s share, he has been materially impacted by a company that might have been influenced by DLF, and the litigation serves to protect an investor from any potential harm from DLF’s association with said fraudulent companies. The Tribunal used the case precedent that was outlined in the cases of Investors Grievances Forum[8], the case of Mr Deepak Khosla[9] and in the case of QVT Fund LP[10], where the courts held that investors of any format cannot be considered as proper or necessary parties to any appeal filed by the company against an order given by SEBI. The only caveat provided to this is that they can prove that they are a part of the direct cause of action against the company that is being challenged. In the following case, we see that Mr Kimsuk forms the reason that SEBI is deliberating on the issues against DLF, but the holdings of the subsidiaries have been changed in a manner that there is no direct chain that links Mr Kimsuk directly to DLF post the change in the control of the subsidiaries. His FIR is a part against a company that was associated with DLF before the order given by SEBI, and thus, Mr Kimsuk gets no solid locus to be a part of the current appeal. Which is how the following case is differentiated from the ruling that was given in the case of JK International. In the case of JK International the person who filed the criminal complaint was directly aggrieved by the conducts of the respondents, therefore had sufficient grounds to be made a proper party to the case.

In the following fact backdrop, the dispute of disclosure lied completely between DLF and SEBI, and while MMrKimsuk played an important role in highlighting the lack of disclosure, he had no further role to play in the case that now lied between DLF and SEBI, his rights and interests lied with Sudipti, and not any other proceedings that might have occurred as a residue from his claim thereof. SEBI’s key aim is to protect investors, therefore, any person with material information that could potentially impact investor confidence and right should be allowed to initiate litigation, here the person giving information plays the role of a whistleblower. While whistleblower would imply illicit dealings, here the role of this third party remains merely to provide the right authorities with the information that they might need or have overlooked to form a legitimate case. Limiting the authority of initiating litigation only to actual investors thereby significantly limits the scope of people who might have actual claims to protect investor rights but would be barred simply because they are not investors themselves. While investors are a key stakeholder of a company, many other forms of stakeholders indulge with the company daily and thereby should be allowed to initiate proceedings if their rights have been harmed. This is because as the shares trade in an open market, the repute of the company plays an essential role in defining the share price, therefore, any person bringing litigation on a company is likely to harm the company image and subsequently the share price. Thereby, if non-investors are allowed to bring valid claims on the company, their suit can rather help the investors by informing them of potential malice in the part of the company.


The substance of the case provides that the tribunal had taken a very mechanical understanding of the law. While SEBI based their case too much on provisions that didn’t apply. Both these approaches weren’t ideal as they both kept to the extreme ends on the interpretation of the laws. While SEBI took a very liberal approach, the tribunal took a very mechanical approach. A blanket reading of the facts provides for the understanding that DLF might have had both the knowledge of the transactions and sufficient control over the subsidiaries in question. In which case what SEBI’s penalties might have been justified, however, the approach taken for its execution wasn’t. the realm of the separate legal entity remains sacred to the companies, thus any case that uses its powers to cross this line must do so very judicially. However, at the same time, the courts must make sure that the board members in a company are kept under constant check to ascertain that their personal criminal actions aren’t mounted on a company with no personal liability. This case can be cited as an example where the court took a very conservative approach when trying to lift the corporate veil and to understand what the ambit of a proper party might look like.

In the Indian context, spouses have often been used as dummy faces while the husbands exercise their authority and decisions under their name. this means that if cultural understanding was used by the tribunal, they could have seen that DLF might have had sufficient control via their key managerial personnel. In which case in order to provide full justice, the corporate veil should have been pierced and the directors should have been held for the deceitful transactions. For now, this case set a very high bar on piercing the corporate veil with the assumption that the law must be read very mechanically. As far as disclosure is concerned, the substance of the case gives the understanding that these transactions had no real impact on the IPO, as the companies had no real relationship with DLF and thus required no disclosure as they didn’t materially impact DLF or its IPO.

Finally, the understanding of proper parties must be broadened. As we saw that even though the person bringing the case did not constitute a proper party, he still had material information that could have impacted the rights of the investors. Thus, dismissing the claim purely on lack of share subscription should be removed, the law must consider everyone who might bring essential information for the protection of investor rights.

[1] securities and exchange board of india (disclosure and investor protection) guidelines, 2000

[2] WTM/RKA/IVD-7/117 – 124 /2014

[3] Paragraph 21, Appeal No. 331 of 2014

[4] SAT Order Number 331 of 2014

[5] ‘Corporate Veil Definition | Protecting The Corporate Veil’ (The Strategic CFO, 2020) <> accessed 21 October 2020.

[6] State of UP v Renusagar Power Co, 1988 AIR 1737

[8] Application No. 63 of 2002

[9] Application No. 120 of 2013

[10] Application No. 88 of 2014

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