DLF promoters to sell 40% in rental arm

K P Singh and his family, promoters of India’s largest real estate company, DLF, will sell their 40 per cent stake in the company’s rental arm, DLF Cyber City Developers Ltd (DCCDL), to institutional investors. The stake is estimated to be worth Rs 12,000-14,000 crore.

A decision on the matter was taken at a meeting of the company’s board on Thursday, based on the recommendations of a committee set up to suggest ways to drive growth in the rental business. The business accounts for annual income of about Rs 2,400 crore.

The promoters will reinvest a significant part of the amount raised through the sale into DLF. As of now, promoter stake in DLF stands at 75 per cent.

According to the Securities and Exchange Board of India’s norms, promoters cannot hold more than 75 per cent stake in a firm. As such, after the transaction, the promoters could opt for a qualified institutional placement, etc, to reduce their stake to 75 per cent.

“With the proposed transaction, DLF will be able to achieve three objectives — removal of conflict of interest, creation of a rental platform with financial investors and reduction of debt,” said Saurabh Chawla, senior executive director (finance), DLF. He added the company would also be able to set up a real estate investment trust in the capital market, in partnership with long-term financial investors.

In 2009, DLF had announced the merger of its subsidiary DCCDL with its promoters’ firm, Caraf Builders and Constructions. Subsequently, DCCDL had issued compulsorily convertible preference shares (CCPS) worth Rs 1,597 crore to the promoters. Following the conversion of CCPS into ordinary shares, the promoters would hold 40 per cent stake in DCCDL, which held the bulk of DLF’s commercial assets, it was decided.

In a filing to the BSE exchange on Thursday, DLF said its board had approved the recommendations of the audit committee to resolve the issue of the CCPS held by promoters in DCCDL.

“The audit committee evaluated several options available to the company to reduce the conflict of interest with the CCPS holders in relation to the rental business. After the deliberations, it recommended the board consider the proposal that CCPS holders sell these shares to unrelated third-party institutional investor(s).”

The panel suggested DLF finalise the strategic terms of transaction, including the selection of third-party institutional investors, and oversee and facilitate the transaction, in consultation with the promoters. It also recommended the company appoint bankers and tax and legal advisors to assist in the transaction. The promoters should reinvest in the company a substantial amount (net of taxes/other charges) of the consideration received from the sale of CCPS, it added.

“After deliberation and upon the CCPS holders conveying their consent, the board accorded its approval for the transaction. Upon completion of the proposed transaction, the company will continue to hold 60 per cent equity interest in DCCDL on a fully diluted basis,” the filing read.