SAT Overturns Sebi Order, Clears Bombay Dyeing of Financial Misrepresentation
The Securities Appellate Tribunal delivered a significant ruling on Friday. It set aside the market regulator's 2022 order against Bombay Dyeing & Manufacturing Company Ltd. The tribunal cleared the company, its promoters, and related entities of allegations involving financial statement misrepresentation.
Majority Decision Sets Aside Penalties
In a majority ruling, SAT set aside all penalties imposed by the Securities and Exchange Board of India. The tribunal directed that any amounts already paid must be refunded within four weeks. This decision covers penalties imposed on the company, members of the Wadia family, and other entities.
Sebi had previously barred ten entities from accessing the securities market. These included Bombay Dyeing and its promoters Nusli N. Wadia, Ness Wadia, and Jehangir Wadia. The regulator had imposed cumulative penalties totaling ₹15.75 crore.
Sebi's Original Allegations
The market regulator had accused Bombay Dyeing of involvement in a fraudulent scheme. Sebi claimed the company misrepresented financial statements from FY11-12 to FY17-18. The allegations centered on inflated sales of ₹2,492.94 crore and profits of ₹1,302.20 crore.
Sebi argued these inflations occurred through transactions with group company SCAL Services Ltd. The regulator specifically pointed to eleven memorandums of understanding signed between Bombay Dyeing and SCAL. These MOUs covered bulk sales of flats and allotment rights for 325 units.
Sebi maintained these agreements, signed between March 2012 and March 2014, were sham transactions. The regulator claimed they served no genuine business purpose.
Tribunal's Findings on MOUs
The Securities Appellate Tribunal examined four connected appeals related to this case. After thorough review, SAT held that evidence on record does not support Sebi's claims. The tribunal found no proof that the MOUs between Bombay Dyeing and SCAL were fake.
SAT also rejected the allegation that these agreements artificially increased Bombay Dyeing's revenue or profits. The tribunal noted that SCAL actually sold some of these flats to final buyers. This fact clearly demonstrates the genuine nature of the MOUs, according to SAT.
The order referenced similar arrangements from earlier years. SCAL had entered into comparable MOUs with Bombay Dyeing back in 2006-07. Under another project, the company successfully sold 100 flats through this mechanism.
The SAT order included a telling observation. "The proof of pudding is in eating," it stated. The fact that no doubts were raised about the ultimate sale of flats by SCAL to buyers justifies the bona fide nature of the MOUs.
Share Price and Promoter Holdings Analysis
The tribunal examined additional aspects of Sebi's case. SAT noted that Sebi had not found any abnormal movement in Bombay Dyeing's share price. This lack of unusual trading activity was significant given the alleged financial misstatements.
Furthermore, Sebi did not allege that promoters or related entities profited from selling shares at inflated prices. The tribunal observed that promoter shareholding remained stable during the period under scrutiny. In some cases, promoter holdings actually increased.
Control and Regulatory Obligations
Sebi's case had relied heavily on the shareholding structure of SCAL Services. The regulator argued that although Bombay Dyeing's direct stake was capped at 19%, indirect holdings allowed complete control.
SAT rejected this approach entirely. The tribunal held that regulatory obligations cannot be imposed based on inferred control. SAT emphasized that Sebi could not retrospectively treat SCAL as an associate or related party. This retroactive classification lacked clear statutory mandate at the relevant time.
Dissenting Opinion
The decision was not unanimous. Presiding officer Justice P. S. Dinesh Kumar dissented from the majority view. He agreed with Sebi's position that the MOUs with SCAL were non-genuine.
Justice Kumar supported the regulator's contention that Bombay Dyeing had artificially inflated revenues and profits. However, the two technical members on the tribunal disagreed with this assessment. Their majority view ultimately prevailed in the final ruling.
This case represents a significant development in securities regulation jurisprudence. The tribunal's emphasis on concrete evidence over inferred control establishes important precedents. Market participants will closely study the implications for future regulatory actions.
