DLF, India's most indebted realty firm, faces tough choices after fund-raising ban

Written by Reuters | New Delhi | Updated: Oct 15 2014, 18:13pm hrs
DLFDLF has been banned from the capital markets for three years, Sebi's harshest penalty ever. (Reuters)
DLF Limited will be forced to sell assets, even unfinished projects, to meet debt obligations, say bankers, after India's biggest property firm was banned from the capital markets for three years - the market regulator's harshest penalty ever.

The Securities and Exchange Board of India (SEBI) ruling on Monday will cut off DLF's access to the Mumbai stock market, Asia's best-performing bourse this year. The company, shouldering $3 billion of debt, will also be barred from the bond market just as its free cash flow sinks to multi-year lows.

The ban follows what SEBI said was DLF's failure to provide key information on subsidiaries and pending legal cases at the time of its record-breaking 2007 initial public offering. On Tuesday, DLF shares fell to a record low at the market close, wiping out $1.2 billion in market value.

The SEBI ban comes as slowing home sales due to poor consumer sentiment, high inflation and interest rates hit developers in Asia's third-largest economy. Bankers and analysts say the only option left for DLF, India's most indebted property developer, is to divest assets, even half-complete projects, if the SEBI order is upheld.

"That's the only practical option because the banks are also very cautious in lending to the sectors like real estate. So refinancing would not be that easy," a banker with a large U.S. bank that previously worked with DLF said, declining to be named as he was not allowed to speak to the media about client-specific issues.

The ruling also adds to the regulatory pressure and political scrutiny on DLF.

DLF is facing a probe from the antitrust watchdog and has been accused by the media and political opponents of entering into improper land deals with well-connected businessman Robert Vadra. DLF and Vadra, the son-in-law of opposition Congress party chief Sonia Gandhi, have denied the allegations.

The SEBI ban also comes ahead of the state assembly elections in the northern state of Haryana on Wednesday. Any change in government could affect DLF's future projects in the region, analysts say.

An official at the Securities Appellate Tribunal said DLF could try and ask for a stay on the order until the appeal is heard. DLF declined to comment beyond the statement it issued late on Monday. The company said it would defend itself against the order passed by SEBI.

SEBI is embarking on a plan to standardise corporate reporting in India, and chairman U.K. Sinha has warned that non-compliant companies will be punished.


DLF's net debt stood at about 185 billion rupees ($3 billion) at end-March and its rate of interest was 12.08 percent, according to the company's annual report. Its free cash flow for the fiscal year ended March 31 fell to 5.18 billion rupees, the lowest in four years, Reuters data shows.

ICRA estimates about 59 percent of DLF's total outstanding debt of about 224.11 billion rupees at end-March to be bank-funded and the remainder as non-bank, according to Rohit Inamdar, a senior analyst at the Indian credit rating agency.

"In the short term, this is a big issue for DLF clearly because there is a looming liquidity crisis in case the sales velocity does not pick up," said V Krishnan, a sector analyst at Mumbai-based brokerage Ambit Capital.

Ambit estimates that with about 57 million square feet of projects under development, DLF needs about 2 billion rupees a month towards construction costs, and its interest outflow to service debt is also about 2 billion rupees a monthly currently.

The company's operating cash flow of about 3 billion rupees will barely cover its construction costs and half its interest cost, given the slow pace of home sales in DLF's primary market of Delhi and the surrounding region, Krishnan said.

"DLF will either need to slow its pace of execution in under-construction projects or monetise some of its assets at distressed valuations to contain or improve its operating cash inflows," said Krishnan, adding that it could look for term loans from banks though that will not come cheap.

DLF, which builds homes, offices and shopping centres and has about 26 million square feet of leased assets, will also be barred from listing a Real Estate Investment Trust (REIT) for three years, shutting yet another avenue for raising funds.

Shares of DLF have slumped 37 percent this year, while the benchmark BSE index has risen about a quarter, making it the best performing index in Asia.