The Securities Appellate Tribunal (SAT) today set aside the penalties of over ₹15 crore imposed on Bombay Dyeing and Manufacturing Company Ltd (BDMCL) and its promoters by the Securities and Exchange Board of India (SEBI) [The Bombay Dyeing and Manufacturing Co Ltd & Anr v. SEBI]

SEBI has failed to establish that BDMCL ran a “fraudulent scheme” to inflate its profits, the SAT ruled.

Those granted relief include Nusli, Ness and Jehangir Wadia, group entity SCAL Services Ltd, independent directors and CFOs.

The ruling came by a 2-1 majority, with the Presiding Officer Justice PS Dinesh Kumar upholding SEBI's findings and technical members ruling in favour of Bombay Dyeing.

SEBI had alleged that between FY 2011-12 and FY 2017-18, Bombay Dyeing executed 11 Memoranda of Understanding (MoUs) with SCAL, a Wadia Group company, for bulk sale of flats in its projects in Mumbai, booking revenue of ₹2,492.94 crore and the 'profit before tax' of ₹1,302.20 crore.

The regulator declared these as sham transactions designed to artificially inflate the listed company's financials and mislead investors, in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

It alleged that Bombay Dyeing had fraudulently inflated revenue and profits in violation of SEBI’s regulations and imposed a penalty of over ₹15 crores on the company, its promoters, senior executives, SCAL and its directors.

However, SAT's technical members Meera Swarup and Dheeraj Bhatnagar rejected SEBI's findings and held that it had failed to establish any fraudulent scheme or artificial inflation of profits.

"In our considered opinion, no adverse view can be taken in the matter. Generally, uncertainties prevail in construction business and litigations are also one of the common bottlenecks. However, a prudent business entity does not stop entire gamut of activities except for the activities for which injunction by a court / authority is granted. Therefore, there is nothing unusual in BDMCL entering MOUs with SCAL (or any third party) during the period when construction was stopped," the tribunal opined.

The majority held that the MoUs related to real projects, where all flats were actually constructed and sold, and that the revenue recognition followed the applicable accounting standard. It also noted that the financials declared by Bombay Dyeing were neither fictitious nor sham merely because SEBI disagreed with the accounting treatment.

It stressed that the bulk-sale MoUs with SCAL were disclosed in the notes to accounts year after year, adding that none of the elements of the alleged fraudulent scheme could be established on facts.

“It is not a case of inflation of financials by creating fictitious book entries. No doubts were raised on the genuineness of ultimate sale of flats by SCAL to the buyers is sufficient to justify the bona fide of the MOUs,” the tribunal observed.

The majority opinion also recorded that throughout the inspection period, the promoter shareholding in Bombay Dyeing either remained static or increased from 52.07% in FY 2011‑12 to 53.69% thereafter, undermining SEBI’s theory that promoters sought to profit from inflated numbers.

It observed that SEBI had not conducted any price-impact or trading analysis to show how the alleged inflated profits induced investors.

The tribunal also flagged an “inordinate delay” by SEBI, finding that the show-cause notices were issued nearly nine years after the first alleged violation.

The majority, thus, allowed all four appeals and quashed SEBI's October 2022 orders.

Justice Kumar, however, dissented and found the MoUs were not principal-to-principal agreements.

The judge opined that SCAL functioned as "an extended arm" of Bombay Dyeing with a negative net worth.

“The detailed facts of the case lead to an irresistible inference that Bombay Dyeing had booked a revenue of ₹2,492.94 crores based on the MoUs and a profit before tax of ₹1,302.20 crores in a deceitful manner” Justice Kumar said. “Such artificial profits lure gullible investors to invest in the scrip and such market abuse cannot be countenanced,” the Presiding Officer wrote.

He, thus, ordered dismissal of the appeals with costs of ₹50 lakh and ₹10 lakh payable to the Investor Protection Fund.​

Considering the majority view, the tribunal set aside the SEBI orders and directed that amount of penalty, if paid, by the appellants shall be refunded within four weeks.

Senior Advocates Darius Khambata and Mustafa Doctor with advocates Rohan Kelkar, Abhay Jadeja, Varun Satiya, Arun Unnikrishnan, Urvi Gulechha briefed by Jadeja & Satiya appeared for Bombay Dyeing.

Senior Advocate Navroz Seervai with advocates Abhishek Venkatraman, Arti Raghavan, Sonam Pandey briefed by Sujit Lahoti & Associates appeared for SCAL Services.

Senior Advocate Gaurav Joshi with advocates Sumit Rai, Kajol Punjabi, Mihir Mody, Yash Sutaria, Tushar Bansode briefed by K Ashar & Co. appeared for SEBI.

[Read Judgment]