While slapping a penalty of Rs3.75 crore, market regulator Securities and Exchange Board of India (SEBI) has barred former senior management of Kwality Ltd for two years for their involvement in misstating financial figures between FY16-17 and FY18-19.
SEBI fined Sanjay Dhingra, former chairman and managing director (CMD) and Sidhant Gupta former executive director and non-executive director Rs1.5 crore each. It also fined Satish Kumar Gupta, former chief financial officer (CFO) Rs75 lakh.
In an order, K Saravanan, chief general manager (CGM) of SEBI, "I note that the financial statements of Kwality were fraudulently manipulated and the figures contained therein were significantly misstated or misrepresented including revenue and sales, expenses, capital assets, inventories, debtors payable, creditors receivable, etc. leading to publication of untrue and misleading financial results of the company during FY16-17 to FY18-19. Had the above instances of misstatement or misrepresentation in the financial statements of Kwality been correctly reflected and published in the form of actual financials, the profit or losses and financial position of the company would have been different from the reported financial statements. The above violations would attract the provisions of PFUTP Regulations and LODR Regulations read with SEBI Act"
The investigation was referred to SEBI by the Income Tax Department (IT), after the department did search and seizure operations on 23 March 2018. The national company law tribunal (NCLT) ordered the liquidation process of Kwality in January 2021.
SEBI initiated an investigation for the 2016-2018 period to ascertain whether there was any violation of the provisions of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) and the Listing Obligations and Disclosure Requirements (LODR) rules.
SEBI during its investigation noted that Mr Dhingra, CMD of Kwality Ltd, was actively involved in the company's operations from FY16-17 to FY18-19. During this period, he attended 26 out of 27 board meetings and certified the annual reports. However, it was found that Mr Dhingra was responsible for furnishing fraudulent compliance certificates to the board of directors, thereby violating Regulation 17(8) of the SEBI LODR Regulations.
Further, Sidhant Gupta, serving as a non-executive director, attended 16 out of 17 board meetings and was part of the audit committee during the investigation period. Alongside Dhingra, he was identified as one of the decision-makers overseeing the day-to-day operations of Kwality Ltd. The investigation revealed that Kwality Ltd.’s financial statements were misrepresented by inflating revenues and expenses and misrepresenting receivable accounts. Mr Gupta's role as a director made him equally accountable for these non-compliances.
Satish Gupta was the CFO of Kwality from FY16-17 to FY18-19 (till October 27, 2018). Regulation 17(8) of LODR Regulations requires the CFO to certify that the financial results do not contain any false or misleading statements or figures and comply with accounting standards, laws, and regulations. Mr Gupta certified in Kwality's annual reports for FY16-17 and FY17-18 that the financial statements and cash-flow statements were accurate, complete and not misleading, presenting a true and fair view of the company's affairs.
Despite certifying that the financial statements were accurate and compliant, the investigation found significant misrepresentations during the CFO’s tenure.
During the course of investigation it was noted that the amount of misrepresentation as calculated by the auditor was Rs7,574.88 crore
Mr Saravanan, the CGM of SEBI also said that "A company, being an artificial person, cannot act on its own and must act through its directors, who are expected to perform their duties with utmost care, skill, and diligence. Directors of Kwality, as individuals, are responsible for the company's non-compliances. According to Section 179 of the Companies Act, 2013, the Board can exercise all powers and actions legally authorised for the company. Additionally, Section 166 requires directors to exercise their duties with due care, skill, diligence, and independent judgment. Under Section 27 of the SEBI Act, if a company violates any provision, every responsible person in charge at the time is deemed guilty and liable for punishment"
Accordingly, SEBI also restrained Mr Dhingra, Sidhant Gupta and Satish Gupta from holding any position of director or associating themselves with any listed public company or a public company, which intends to raise money from the public, for two years.
