SAT relief for Bombay Dyeing and Wadias in Sebi market ban case

Tribunal stays order restraining company and promoters from capital markets for 2 years

In a relief to Bombay Dyeing and Manufacturing Company and its promoters Nusli Wadia, his sons Ness Wadia and Jehangir Wadia, the Securities and Appellate Tribunal (SAT) has stayed the effects of an order by the Securities and Exchange Board of India (Sebi) restraining them from the capital market for two years. The matter will be next heard in January 2023.

In an order dated October 21, Sebi had alleged that Bombay Dyeing with the help of its associate company Scal, had inflated revenues and profit by Rs 2,494 crore and Rs 1,302 crore, respectively, for a period from financial year (FY) 2011-12 to FY 2017-18.

A counsel for Bombay Dyeing argued that accounting standards do not require consolidation in accounting for Scal. He said that there has been no diversion of funds, no impact on share price, no findings of dealings in the securities, and there were no allegations of fraud in Sebi's show-cause notice.

Alleging targeted approach in Sebi order, the counsel representing Wadias said, “Why were these three people picked? There is nothing specific alleged against them (promoters) than what any other director would have knowledge of. The accounts were audited year after year by a well reputed auditor firm. There has been no charge against the auditor firm or show cause notice against them.”

Bombay Dyeing also requested the tribunal to allow its rights issue offer to be processed without any influence of the Sebi order as the company is starved for funds. Sebi doesn’t process fund raise requests in case an order or a show-cause notice has been issued. On September 22, the company’s board had approved its rights issue draft to raise up to Rs 940 crore.

A Sebi counsel argued that the rights issue offer was ‘engineered before the order’.

As Sebi’s order has prohibited the promoters from holding director or key managerial positions in any listed company or an intermediary, the counsel argued that it will affect other companies like Britannia and National Peroxide where they hold such positions.

The Sebi counsel alleged that it was an intelligent move to keep shareholding in Scal deliberately at 19 per cent’ to get through accounting standards. Bombay Dyeing counsel countered the argument that the shareholding was under a structure permissible by law and preferred by many companies.

Sebi counsel argued that the basic premise of the case remains that Scal was used to inflate revenues and profit of the company, and sales made to Scal were not genuine and were misleading to the markets. He added that Bombay Dyeing was the only shareholder in Scal through group companies and it was always controlled by the company. Moreover, flat sales shown by Bombay Dyeing have not been shown as purchases by Scal.

Senior advocate Darius Khambata and JP Sen represented Wadias while Somasekhar Sundaresan argued for Bombay dyeing. Sebi was represented by senior counsel Gaurav Joshi.

Along with the ban on promoters from accessing the securities market for two years, the market regulator had also slapped a cumulative penalty of Rs 15.75 crore on eight individuals and two entities, in the matter.