SEBI Bars 10 Entities, Including Bombay Dyeing and Its Promoter Wadias, from Markets for Up to 2 Years; Imposes Rs15.75 Crore Penalty
Moneylife Digital Team 22 October 2022
Market regulator Securities and Exchange Board of India (SEBI), while imposing a penalty of Rs1,575 crore, has barred ten entities, including Bombay Dyeing & Manufacturing Co Ltd (BDMCL) and the company promoters, from markets for up to two years. BDMCL's non-executive chairman Nusli N Wadia, non-executive director Ness N Wadia, and erstwhile managing director (MD) Jehangir N Wadia are also prohibited from being associated with markets, including as a director or key managerial personnel in a listed company for one year. 
In a 100-page order, Ananta Barua, whole-time member (WTM) of SEBI says, " is clear that Scal Services Ltd (Scal) was a 'related party' of BDMCL for the financial years from FY14-15 to FY16-17. I note that in accordance with the stipulations of clause 49(VIII)A(1) of the erstwhile listing agreement and regulation 27(2)(b) of SEBI (LODR) regulations, 2015, BDMCL was required to disclose all material transactions with Scal in the quarterly corporate governance compliance report, which, I find that, it has failed to disclose. I note that, as observed in the preceding paragraph, the transactions between BDMCL and Scal were indeed material. Therefore, I find that BDMCL has violated the provisions of clause 49(VIII)A(1) of the erstwhile listing agreement (as amended from April 17, 2014) and Reg. 27(2)(b) of SEBI (LODR) regulations, 2015. For the aforesaid violations, I find that BDMCL is liable to be imposed with appropriate penalty under Section 15 HB of the SEBI Act, 1992 r/w. Reg. 103 of SEBI (LODR) regulations, 2015."
Besides BDMCL and Scal, the SEBI order imposes a penalty and a debarment from markets to Nusli N Wadia, Ness N Wadia and Jehangir N Wadia. Durgesh Mehta, who was joint MD of BMMCL from April 2010 to February 2014, is also penalised. 
The other four in the SEBI order are directors of Scal, including DS Gagrat, NH Datanwala, Shailesh Karnik and R Chandrasekharan.
SEBI imposed a penalty of Rs2.25 crore on BDMCL, Rs4 crore on Nusli Wadia, Rs2 crore on Ness Wadia, Rs4 crore on Jehangir Wadia and Rs50 lakh on Mr Mehta. All of them are barred from markets for two years
The market regulator imposed a penalty of Rs1 crore on Scal and Rs25 lakh each on the company's four directors. These five entities are barred from markets for one year. 
Based on complaints, SEBI investigated BDMCL for FY11-12 to FY18-19 and issued a show cause notice (SCN) on 11 June 2021. The notice says, "Considering that BDMCL reduced its shareholding to 19%  in Scal and consequently entered into various memorandums of understanding (MoUs) with Scal, its group company, for recognising revenue, it is alleged that by way of entering into such MoUs with Scal and not consolidating the transactions carried out with Scal, BDMCL was involved in the misrepresentation of its financial statements on a consolidated basis. It is further alleged that Scal, being directly or indirectly owned by BDMCL, was an extended arm of BDMCL which enabled BDMCL to recognise revenue and profits by entering into MoUs."
"BDMCL used Scal for artificially inflating its sales and profits during FY11-12 to FY17-18," the SCN says, adding, "Scal was having a negative net worth of Rs3 crore, Rs14 crore and Rs42 crore as on 31 March 2012, 31 March 2013 and 31 March 2014, respectively, still BDMCL entered into various MoUs with Scal under which Scal was expected to make a payment of Rs3,033 crore over several years based on the physical stage of construction of Project One Island City Centre (ICC) and Project Two ICC."
As required under various MoUs, Scal was required to pay 10% of the total consideration within 60 days of the date of MoU. "Being a negative net worth entity, Scal did not have funds of its own. The payment made by Scal towards booking amount was financed through borrowings from various group companies of BDMCL and external entities. As submitted by the statutory auditor of BDMCL vide letter dated 12 February 2021, till 31 March 2014 and 31 March 2015, Scal had made payment of Rs262 crore and Rs436 crore, respectively, to BDMCL towards the purchase of flats under various MoUs. For making the aforesaid payments, funds to the tune of Rs113 crore and Rs266 crore were borrowed by Scal from various Wadia group companies as on 31 March 2014 and 31 March 2015, respectively. As seen from the financial statements of Britannia Industries Ltd (BIL) 'another group company of Wadia group' for FY14-15 and FY15-16, the loan was advanced by BIL to Scal based on comfort letter from BDMCL."
The SCN from SEBI alleged that "BDMCL, along with Scal, executed a 'well thought out and deliberate' fraudulent and manipulative scheme to record non-genuine sales made to Scal to the tune of Rs2,492.94 crore and profits to the tune of Rs1,302.20 crore during FY11-12 to FY17-18 by fraudulently entering into MoUs with Scal, a group company. The entire shareholding of Scal was structured in a manner to camouflage the actual shareholding of BDMCL in Scal. This structured manner of devising the shareholding pattern reflects a deliberate attempt on the part of BDMCL and its promoters to mislead the non-promoter investors of the listed entity. By holding its entire shareholding in Scal through various other investment companies of Wadia Group, BDMCL ensured non-consolidation of transactions carried out with Scal although exercising absolute control over Scal. Based on the same, the consolidated financial statements of BDMCL are alleged to be untrue and misleading for the shareholders of the listed company during the investigation period." 
In the order, Mr Barua observed that because of the misrepresentation of financial statements of BDMCL, the revenues and profit of BDMCL were inflated by Rs2,492.94 crore and Rs1,302.20 crore, respectively, during the period from FY11-12 to FY17-18. Subsequently, Scal's real estate business was ultimately merged with BDMCL from 1 July 2018.
"I also note that the SCN does not allege any diversion of funds or mis-utilisation or siphoning of assets of the listed company, for the benefit of promoters or directors of BDMCL or Scal...the impact of 'concealment of a real picture and postulation of the artificial picture', on the share price of a scrip, can hardly be assessed and recreated without the actual events taking place in reality. Thus, it is practically impossible to quantify the loss caused to investors in the event of misrepresentation of financial statements," the WTM noted in his order.
3 months ago
Creating turnover of Rs2,492.94 crore and profits to the tune of Rs1,302.20 crore, does not seem to wakeup our WATCHDOGS. With misappropriated Rs 1302 profits, how many investors were lured to buy Bombay Dyeing shares? Why only 19 cr penalties, why not 190 crs?. Watchdogs donot have courage to take deterrent actions. All small share holders of Bombay Dyeing during the affected period can be distributed Rs 190 cr ( suggested penality instead of Rs 19cr). Such flagrant actions must be penalised.
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