SEBI Can't Go After Unlisted Group Company, Bombay Dyeing Tells SAT
SEBI had barred Bombay Dyeing, its promoters from the market for two years for fraudulent misrepresentation of firm's statements.
The Securities and Exchange Board of India has no jurisdiction to proceed against an unlisted Wadia Group company, senior advocate Navroz Seervai argued before the Securities Appellate Tribunal on Wednesday.
Seervai is representing Scal Services Ltd., in which Bombay Dyeing and Manufacturing Co. has 19% stake.
Scal is an unlisted public company, whose shares are not traded in the market, unlike Bombay Dyeing. Since SEBI has no jurisdiction over unlisted companies, it can't pass directions against such an entity, Seervai said.
SEBI should have addressed these facts before it assumed jurisdiction in the case, he said.
No authority can assume jurisdiction that it otherwise does not have.Navroz Seervai, Counsel for Scal Services Ltd.
Last October, SEBI had barred Bombay Dyeing as well as its promoters—Nusli N Wadia, Ness Wadia, and Jehangir Wadia—from the stock market for two years for fraudulent misrepresentation of the company's statements. The regulator also barred Scal from the market for a year and fined it Rs 1 crore for aiding and abetting the fraud.
According to SEBI, Bombay Dyeing defrauded its investors by fraudulently inflating its profit between 2011–12 and 2017–18. For instance, it sold flats to Scal through a memorandum of understanding. Through this arrangement, Bombay Dyeing's profit increased by Rs 1,302 crore, while its sales increased by Rs 2,493 crore.
The regulator had highlighted that Bombay Dyeing kept its shareholding in Scal at 19%. Consequently, it didn't have to consolidate financial statements of Scal since the accounting rules prescribe a threshold of 20% shareholding in an associate company for the purposes of consolidated statements.
Had the financial statements of Scal been consolidated, the inter-se sales of flats would not have been accounted for and, therefore, the sales and profit figures of Bombay Dyeing would have been reduced to that extent, the regulator had said.
SEBI had concluded that Scal aided and abetted with Bombay Dyeing to mislead the minority shareholders of the latter. The actual financial position of Bombay Dyeing was hidden from its minority investors, constituting manipulative, fraudulent and unfair trade practice.
Contesting this, Seervai said there is no provision, either in the SEBI Act or in the SEBI Unfair Trade Practices Regulations, that explicitly punishes aiding and abetting any securities market offence. "To say that directly or indirectly used in the SEBI Act and SEBI Unfair Trade Practices Regulations is inclusive of aiding and abetting, is a stretch, as most Indian legislation explicitly punish aiding and abetting of offenses."