The Securities Appellate Tribunal (SAT) recently overturned a 2022 order issued by the market regulator, Securities and Exchange Board of India (Sebi), that had accused Bombay Dyeing & Manufacturing Company Ltd, along with its promoters and associated entities, of misrepresenting their financial statements. In a significant majority ruling, the SAT not only set aside the penalties that Sebi had imposed on the company and members of the Wadia family but also mandated that any amounts previously paid as penalties must be refunded within a four-week period.

Sebi's initial order had barred a total of ten entities, including Bombay Dyeing and its prominent promoters Nusli N. Wadia, Ness Wadia, and Jehangir Wadia, from participating in the securities market. Additionally, Sebi had levied cumulative penalties amounting to ₹15.75 crore. The regulator's core allegation was that Bombay Dyeing engaged in a fraudulent scheme to inflate its financial statements between the fiscal years FY11-12 and FY17-18. This was purportedly achieved by artificially boosting sales figures by ₹2,492.94 crore and profits by ₹1,302.20 crore through transactions conducted with its group company, SCAL Services Ltd.

A critical component of Sebi's case revolved around eleven memorandums of understanding (MoUs) signed by Bombay Dyeing and SCAL. These MoUs, dating from March 30, 2012, to March 27, 2014, pertained to the bulk sale of flats or allotment rights for 325 flats. Sebi alleged that these MoUs were nothing more than a sham intended to manipulate financial records.

However, the SAT, in allowing four interconnected appeals, meticulously reviewed the evidence presented. The tribunal concluded that the available records did not support Sebi's claim that the MoUs between Bombay Dyeing and SCAL for booking flats were fake or designed to artificially inflate Bombay Dyeing's revenue or profits. The SAT highlighted that SCAL had indeed sold some of these flats to final buyers, which, in the tribunal's view, unequivocally demonstrated the genuineness of the MoUs. Furthermore, the tribunal noted that SCAL had entered into similar MoUs with Bombay Dyeing in previous years (2006–07) and successfully sold 100 flats under another project, reinforcing the legitimacy of their business practices. The SAT order famously stated, “The proof of pudding is in eating and the fact that even in the instant case, 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 also pointed out that Sebi had failed to identify any abnormal fluctuations in Bombay Dyeing’s share price that could be directly linked to the alleged misstatements. Crucially, Sebi had not presented any evidence suggesting that the promoters or related entities had profited by selling shares at inflated prices. On the contrary, the tribunal observed that promoter shareholding either remained stable or even saw an increase during the period under scrutiny, which contradicted the notion of fraudulent intent for personal gain.

Sebi's case further relied heavily on its interpretation of SCAL Services’ shareholding structure, arguing that despite Bombay Dyeing's direct stake being capped at 19%, indirect holdings allowed it to exercise complete control over SCAL. The SAT emphatically rejected this approach, asserting that regulatory obligations could not be imposed based on inferred control. The tribunal clarified that Sebi could not retrospectively treat SCAL as an associate or related party without a clear statutory mandate existing at the relevant time.

It is important to note that the SAT's decision was not unanimous. The presiding officer, Justice P. S. Dinesh Kumar, dissented from the majority, siding with Sebi's original stance that the MoUs with SCAL were non-genuine and that Bombay Dyeing had indeed artificially inflated its revenues and profits. Despite this dissenting opinion, the majority view of the two technical members ultimately prevailed, leading to the setting aside of Sebi's penalties.