All you wanted to know about the DLF-Vadra deal and were afraid to ask

Vivek Kaul
Robert Vadra, son-in-law of Sonia Gandhi has been in news lately for his dealings with India’s biggest listed real estate company DLF. There are a lot of question that the deal has raised. Let’s try and understand some of the answers to those questions, here.
Who owns Sky Light Hospitality Private Ltd?
The company 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 Robert Vadra owns 49,900 shares and his mother Maureen owns 100 shares. So the company is basically owned by Robert Vadra.
What are the total assets of the company?
As per the balance sheet dated March 31, 2011, the company has total assets amounting to Rs48.53 crore. This includes fixed assets of two parcels of land worth Rs 16.18 crore.  The total investments of the company are worth Rs 24.37 crore. The cash and bank balances amount to Rs 4.77 crore and the loans and advances are at Rs 3.21 crore. All these assets add up to the total assets of Rs 48.53 crore.
How can a company with a capital of Rs 5 lakh have assets worth Rs 48.53 crore?
This is the crux of the issue at hand. Robert Vadra and his mother Maureen’s contribution to the business is a measly Rs 5 lakh. How did that Rs 5 lakh grow into assets of Rs 48.53crore? A simple explanation is that Sky Light would have borrowed money and used that borrowed money to buy land, make investments, have cash in the bank and to give out loans. This would mean that the company would have to borrow Rs 48.48 crore (Rs 48.53 crore – Rs 5 lakh of capital). But why would anyone in their right minds give a loan of Rs 48.48 crore to a company with a shareholder capital of Rs 5 lakh?  This would imply a debt to equity ratio of 970. Also as the balance sheet of the company reveals it has not taken any loans.
So where did this money come from?
For this one needs to take a look at the current liabilities side of the balance sheet of the company. The current liabilities of the company are at Rs 58.05 crore. Of this amount the company received an advance of Rs 50 crore from DLF against a plot of land. As a recent statement issued by DLF says “M/s Skylight Hospitality Pvt Ltd approached us in FY 2008-09 to sell a piece of land measuring approximately 3.5 acres just off NH 8 in Village Sikohpur, Dist Gurgaon…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 crores. 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 crores given as advance in instalments against the purchase consideration.” So DLF gave Rs 50 crore as an advance to Sky Light against a piece of land owned by Sky Light. This land is showed to be worth Rs 15.38 crore in the balance sheet of Vadra’s Sky Light. Accounting values assets at historical cost. So that is the price Sky Light must have bought that piece of land. This raises the question as to where did Vadra raise this Rs 15.38 crore from? DLF comes into the picture only later when the company decides to buy  a piece of land from Vadra’s Sky Light.
But what is the difference between a loan and an advance?
Take the case of a salary advance. When any individual takes a salary advance there is no contractual obligation between him the company and at the same time the company does not charge him an interest. The company gives an advance to the employee primarily because there is a relationship between them. Typically employees who have just joined find it difficult to get a salary advance. The same logic works when one company gives an advance to another company.  So the first question to ask here is that was there a relationship between Vadra and DLF? Vadra had told the Economic Times in March last year “I have a good understanding with DLF. Our children are friends, we are friends.” Now just because two promoters are friends does that mean one company will give an advance to another? That is something both DLF and Vadra need to throw light on.
Isn’t this advance of Rs 50 crore a part of Skylight’s current liability?
Yes that is the case. A current liability is essentially a debt or an obligation of a company that needs to be paid up in one year. As DLF’s statement says the advance was paid in instalments starting in 2008-2009 (the period between April 1, 2008 and March 31, 2009). This advance has remained on the books of the company till March 31, 2011. This means that DLF had given an advance to Vadra’s Sky Light for a period of greater than two years. Can this be categorized as an advance? Can this be categorized as a current liability? From the way this looks DLF basically gave Vadra an interest free loan and tried to pass it off as an ‘advance’.
Where does Arvind Kejriwal fit into all this?
What Kejriwal is saying that Vadra’s Sky Light used a portion of this Rs 50 crore advance to buy property from DLF. Sky Light also has a 50% stake in Hilton Garden Inn Hotel, Saket, New Delhi, which it has set up with DLF. The main question that Kejriwal is asking “It is well known that DLF has been given 350 acres of land by Haryana govt for the development of Magnolia project in Gurgaon (where Vadra was allocated 7 apartments) and has been given various other properties and benefits by the Congress governments in Haryana and Delhi. Is that the quid pro quo for DLF giving Vadra the seed money for the purchase of these massive properties worth hundreds of crores?”
In simple English what this means is that because DLF gave Vadra what seems to be an interest free loan rather than advance, did the Congress government return these favours by allocating land to DLF in lieu of that? Was there a quid pro quo? While this allegation can be probed, it will be next to impossible to establish.
Where does all this leave DLF?
The gross debt of DLF stands at a whopping Rs 25,060 crore as on June 30, 2012. At the end of March 31, 2012, the gross debt had stood at Rs 25,066 crore. The annual report of DLF points out “the company’s borrowings from banks and others have a effective weighted average rate of 12.38% per annum.”
We can safely say that this rate of interest of 12.38% wouldn’t have changed dramatically between March, 2012 and June, 2012. So a company which has debt of more than Rs 25,000 crore and is borrowing at greater than an interest rate of 12% is basically giving an interest free loan to Vadra. The high debt level has been a huge concern for the analysts who track the company. As Sandipan Palan analyst with Motilal Oswal wrote in a recent report “DLF’s high debt has been a key concern for investors; however, we believe leverage of Rs 16,000-17,000 crore would be a sustainable level for the company.”
Also DLF says that its deal with Vadra is normal commercial practice. If that is the case it would be great if the company could give us a list of other entrepreneurs to whom the company has given an advance running into Rs 50 crore for a period of greater than two years. That should be put everybody who is crying foul in their place.
The article originally appeared in the Daily News and Analysis (DNA) dated October 10,2012  with a slightly different headline.
(Vivek Kaul is a writer. He can be reached at [email protected])