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Corporate Oct 11, 2012

Explained: How Vadra gained from DLF's benevolence

By Vivek Kaul

The Arvind Kejriwal-led India Against Corruption (IAC) unleashed its second round of attacks on the relationship between Robert Vadra, son-in-law of Sonia Gandhi, and DLF, India's largest listed real estate company, yesterday (9 October).

So what has IAC alleged, and how much of it holds water?

But we will give the bottomline first: how and what did Vadra gain? Business Standard estimates that Vadra's gains from all the sweetheart deals involving DLF could be in the vicinity of Rs 200 crore. And not much of it can be attributed to Vadra's business acumen. It was largely DLF's help that did it. Now, to answer the questions raised by IAC.

First, what was Vadra doing owning a DLF subsidiary company?

Northern India IT Parks Pvt Ltd is a company with an issued capital of Rs 25 lakh. The company has issued 2,50,000 shares with a face value of Rs 10 each.Robert Vadra owns 2,47,500 shares of the company. His mother Maureen owns the remaining 2,500 shares. This means Robert Vadra owns 99 percent of the company.

Both Robert and his mother Maureen were appointed as directors of the company on 19 June 2008. The balance-sheet of the company as on 31 March 2009 shows an investment of Rs 2,50,000. This investment was made to buy a 50 percent stake in DLF SEZ Ltd on 13 October 2008. This investment does not appear on the balance-sheet of the company as on 31 March 2010. DLF bought back the stake from the Vadra-owned Northern India IT Parks in September 2009.

In its statement released to the press, IAC had asked what role Vadra played in the period of almost one year during which DLF SEZ was in his control.

The Arvind Kejriwal-led India Against Corruption (IAC) unleashed its second round of attacks on the relationship between Robert Vadra and DLF.AFP

DLF issued a statement on 9 October explaining the same."In DLF SEZ Holdings Pvt Ltd, 50 percent of shareholding was acquired by North India IT Parks Pvt Ltd in October 2008 at the face value of Rs 2.50 lakh. The said 50 percent shareholding was subsequently bought back from North India IT Parks Pvt Ltd in September 2009 fully at face value of Rs 2.50 lakh, as the proposal for developing SEZs could not take off due to deep recession in the market in year 2009. No benefit or gain was made by Mr Vadra or DLF, in this regard."

So Vadra did not gain any money by owning 50 percent of DLF SEZ. But that does not mean he did not gain anything at all. He used the money he got from DLF to buy apartments, land, plots, etc, without having to pay any interest on it.

How did land valued at Rs 15.38 crore suddenly appreciate to Rs 58 crore?

Sky Light Hospitality Pvt Ltd is another company owned by Vadra.It has issued 50,000 shares with a face value of Rs 10 each and so has an issued capital of Rs 5 lakh. Of this Vadra owns 49,900 shares and his mother Maureen 100 shares.
Some time between 1 April 2008 and 31 March 2009, the company bought a plot of land of 3.5 acres in Manesar, Haryana. This can be said because the balance-sheet of the company as on 31 March 2009, shows this entry. But the balance-sheet as on 31 March 2008 does not show this entry.

This plot of land is valued to be at Rs 15.38 crore in the balance-sheet of Sky Light Hospitality. Against this plot of land DLF gave Sky Light an advance of Rs 50 crore by valuing the land at Rs 58 crore. As the company said in a statement on 6 October "Skylight Hospitality Pvt Ltd approached us in FY 2008-09 (i.e. the period between 1 April 2008 and 31 March 2009) to sell a piece of land measuring approximately 3.5 acres...DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crore. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crore given as advance in instalments against the purchase consideration."

So what does this mean in simple English? It means that Vadra's Sky Light Hospitality approached DLF to sell the 3.5 acres of land it had bought at Rs 15.38 crore. DLF valued this land at Rs 58 crore and gave Vadra's Sky Light an advance of Rs 50 crore against this land. The point that arises here is this. Sky Light Hospitality bought the land between 1 April 2008 and 31 March 2009 for Rs 15.38 crore. They also approached DLF during the same period to sell the land. DLF in turn valued the land at Rs 58 crore.

This is a little difficult to believe. What this means is that the value of the land went up by 3.8 times between the period Sky Light Hospitality bought it and approached DLF - all within a period of one year. One should remind readers that this was also the period during which the global financial crisis was starting. Lehman Brothers went bust on 14 September 2008 and so those were tough days for all markets. The deep 2009 recession that DLF talks about in its 9 October statement was starting.

Where did Vadra raise the initial Rs15.38 crore to buy the land from?

DLF came into the picture only later when the company decided to buy the piece of land from Vadra's Sky Light Hospitality. While this writer could not independently establish where this money came from, a story in Business Standard does the necessary explaining. Sky Light Hospitality, when it was incorporated, had an issued capital of Rs 1 lakh. On this capital of Rs 1 lakh Corporation Bank gave it an overdraft of Rs 7.94 crore. This overdraft is clearly visible as a current liability in the balance-sheet of the company as on 31 March 2008.

As Business Standard points out "He(as in Vadra) must also have had excellent relations with Corporation Bank, whose Friends Colony branch (located close to Mr Vadra's companies' offices in the capital) gave an overdraft of Rs 7.94 crore to Sky Light Hospitality. The newly-incorporated company at the time had total resources of Rs 1 lakh, being its paid-up share capital." This took care of part of the funding for the Rs 15.38 crore land. So this brings Corporation Bank in the loop also. Does the bank give overdrafts amounting to Rs 7.94 crore to companies with an issued capital of Rs 1 lakh regularly?

Did DLF take overthe Manesar land in FY 2008-09 from Vadra's Sky Light Hospitality?

DLF, in its 6 October statement, said that the "plot was taken over by DLF in the financial year 2008-09 itself." If that was really the case, why does the land appear on the balance-sheet of Sky Light Hospitality dated 31 March 2011, as a fixed asset valued at Rs 15.38 crore? Also, DLF's statement (read here) says the advance was paid in instalments starting in 2008-2009 (the period between 1 April 2008 and 31 March 2009). This advance has remained on the books of Sky Light Hospitality till 31 March 2011. This means that DLF had given an advance to Vadra's Sky Light for a period of greater than two years.So if both the land and the advance were on the balance-sheet of Vadra's Sky Light Hospitality at least till 31 March 2011, how did DLF take over the plot in financial year 2008-2009 itself?

IAC raises these questions. It asks whether it is normal business practice for DLF to give an advance as high as it had and on top of that let it remain with the seller of the land (ie Vadra) for more than two years without taking possession? Also, is it normal business practice to let this advance remain interest-free given that DLF borrows money at such a high rate? As on 31 March 2012, DLF had Rs 25,066 crore of debt outstanding. And it was paying an interest of 12.38 percent on this debt. So basically what DLF wants us to believe is an advance is actually an interest-free loan to Vadra.

An advance is typically short term and is settled in less than one year, as we noted in this earlier post. On Sky Light Hospitality's balance-sheet this advance was listed as a current liability. A current liability is essentially a debt or an obligation of a company that needs to be paid up in one year. But this current liability was on the balance-sheet for more than two years.

Was this the only advance that DLF gave Vadra?

Not really. In fact, there is another advance of Rs 10 crore from DLF which is visible on the balance-sheets of Sky Light Hospitality as on 31 March 2010 and 31 March 2009. Again this implies that DLF gave Vadra's company an advance for a period of greater than one year. DLF also said in its 6 October statement that "we wish to categorically state that DLF has given no unsecured loans to Mr Vadra or any of his companies."

This doesn't hold either. The balance-sheet (dated 31 March 2010) of Real Earth Estates Pvt Ltd, another company owned by Vadra, shows a clear entry of Rs 5 crore as a loan from DLF. IAC points out that Real Earth Estates has specified this loan to be an unsecured loan in a filing with the Registrar of Companies. An unsecured loan is a loan in which the lender does not take any collateral against the loan and relies on the borrower's promise to return the loan.

DLF also had advanced Rs 15 crore during the financial year 2008-09 to Sky Light Hospitality. As DLF's 6 October statement says, "Skylight Group of companies also offered us in FY 2008-09an opportunity to purchase a large land parcel in Faridabad and, accordingly, DLF agreed to advance Rs 15 crore in instalments simultaneous to the commencement of due diligence of the said land parcel. After concluding that the said land had certain legal infirmities, we decided against its purchase. Accordingly on DLF's request, the Skylight group refunded the advance of Rs 15 crore in totality."

This entry can be seen in Sky Light's balance-sheet as on 31 March 2009. If one were to add up all this, DLF essentially offered Rs 80 crore to Vadra's companies at various points of time. It is safe to say that a large portion of this was interest free.

So what did Vadra do with this money?
Let's start with Real Earth Estates. This company, as we saw earlier, had got an unsecured loan of Rs 5 crore from DLF. This was a part of the balance-sheet of Real Earth Estates as on 31 March 2010. What is surprising is this: how can a company with an issued capital of Rs 10 lakh be given an unsecured loan of Rs 5 crore? This Rs 5 crore was used to part-fund fixed assets of around Rs 7.09 crore. This includes a plot in Greater Kailash-II in New Delhi, and land in Bikaner, Gurgaon, Mewat and Hassanpur.

Now let's take the case of Sky Light Hospitality which shows an advance received of Rs 50 crore from DLF as on 31 March 2010. In the balance-sheet for the year, a series of taxes deducted at source (TDS) for interest earned on fixed deposits can be seen. There are 19 such entries with a total TDS of Rs 4.95 lakh. TDS is cut at the rate of 10.3 percent when the interest earned on fixed deposits with a bank during the course of one year crosses Rs 10,000. This means that Vadra earned a total of Rs 48.06 lakh (Rs 4.95 lakh/10.3 percent) between 1 April 2009 to 31 March 2010.

This interest would have been earned on a part of the interest-free Rs 50 crore advance from DLF which would have been invested in fixed deposits with banks. So the interest-free money from DLF was invested in fixed deposits by Vadra's Sky Light Hospitality and money was made in the process.

Sky Light Hospitality had a Rs 25 crore advance from DLF on its books as on 31 March 2009. A small portion of this was used to pick up a stake of 50 percent in a hotel joint venture with DLF. This company, called Saket Courtyard Hospitality, runs one hotel in Saket, New Delhi.

The balance-sheets of Sky Light Hospitality also show the company giving advances to other Vadra companies. The balance-sheet of 2008-09 shows an advance of Rs 3.5 crore to Sky Light Realty Pvt Ltd. It also shows an advance of Rs 2.05 crore to Blue Breeze Trading Pvt Ltd. Both these companies are owned by Robert Vadra. Since they got an advance it was interest-free.

This advance was used by Sky Light Realty to fund agricultural land in Palwal and land at Hayyatpur in Haryana. It also used around Rs 9 lakh to book flats with two builders. Sky Light Reality also managed to earn an interest of around Rs 31 lakh (TDS of Rs 3,18,656 divided by 10.3 percent) on fixed deposits by placing a part of these advance in bank fixed deposits.

As on 31 March 2010, Sky Light Hospitality had given a loan of Rs 6.61 crore to Sky Light Reality Pvt Ltd. This was used to fund seven flats in DLF's Magnolias project and which are shown to be worth around Rs 5.23 crore. It was also used to buy a Rs 89 lakh apartment in DLF's Aralias apartments.

How much did Vadra make in the end?

It is very difficult to estimate one number but some calculations can be made. As a Business Standard story points out, "The Aralias and Magnolias flats together would fetch Rs 130 crore or thereabouts, and by DLF's calculation, Mr Vadra's share in the hotel project would be in excess of Rs 50 crore. His total asset base from the two Sky Light companies - all made by rolling over transactions with DLF, and helped by real estate value appreciation - would be in the vicinity of Rs 200 crore, made in five years."

That is not a bad going given that Vadra had very little of his own money at stake.

So it is very clear that Robert Vadrabenefitedfrom his relationship with DLF. Whether DLFbenefitedfrom their relationship with Vadra will be very difficult to establish. But that still raises the question why was DLF someherbanon Vadra? That is the billion dollar question they need to answer.

Vivek Kaul is a writer. He can be reached atvivek.kaul@gmail.com

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by Vivek Kaul

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