1. All these appeals are against a common order and are being taken up together. Since the appeals have been taken up for consideration, the urgency
applications are disposed of.
2. We have heard Shri Darius Khambata, Shri J.P. Sen, the learned senior counsel, Shri Somasekhar Sundaresan, the learned counsel, Shri Navroz
Seervai, the learned senior counsel for the appellants and Shri Gaurav Joshi, the learned senior counsel and Shri Sumit Rai, the learned counsel for the
respondent.
3. The show cause notice alleges that the appellants and other noticees were involved in a fraudulent scheme of misrepresentation of financial
statements of The Bombay Dyeing and Manufacturing Company Limited (‘Bombay Dyeing’ for short) by inflating sales of Rs. 2492.94 crores
and profits of Rs. 1302.20 crores arising from the alleged sale of flats by Bombay Dyeing to SCAL Services Ltd. (‘SCAL’ for short) over a
period from financial year 2011-12 to 2017-18. The show cause notice alleges that the shareholding structure of SCAL was deliberately designed in
such a manner that even though Bombay Dyeing directly held only 19% in the share capital of SCAL, but through its indirect holdings, Bombay
Dyeing was able to exercise complete control over the entire share capital of SCAL. The show cause notice alleged that the direct shareholding of
Bombay Dyeing in SCAL was deliberately designed to keep it at 19% so as to ensure that the definition of Associate Company was not attracted and
therefore the financial statements of SCAL was not consolidated with the financial statements of Bombay Dyeing. It was alleged that if the financial
statements of SCAL had been consolidated with Bombay Dyeing the aforesaid sales and profits of Bombay Dyeing from transaction with SCAL
would not have been reflected in the consolidated financial statements.
4. The Whole Time Member (‘WTM’ for short) of the Securities and Exchange Board of India (‘SEBI’ for short) found that the
consolidation of financial statements of SCAL with Bombay Dyeing was not mandatory and even though there was a deliberate design to directly hold
19% in the share capital of SCAL yet by de facto means controlled the entire share capital of SCAL and Bombay Dyeing was able to eschew from
the compliance of consolidation of financial statements, thereby hatched a grand scheme of fraudulent misrepresentation of the financial statements by
inflating sales and profits of Bombay Dyeing.
5. The question which arises for consideration is, whether the financial statements of SCAL was required to be consolidated with the financials of
Bombay Dyeing. Admittedly, SCAL was not a subsidiary and the question is whether SCAL is an associate of Bombay Dyeing within the meaning of
Section 129 read with Section 2(6) of the Companies Act, 2013. Section 2(6) provides that an associate company means control of atleast 20% of
total share capital under an agreement. Section 129(3) required consolidation of the financial statement of the Company and its subsidiaries. Associate
companies was added with effect from 07.05.2018. Further consideration is, whether non-consolidation of financials amounts to fraud under
Regulation 3 and 4 of PFUTP Regulations.
6. Admittedly, SCAL was an associate company and whether its financial statements were required to be consolidated with the financial statements
of company Bombay Dyeing is to be considered in the present appeal.
7. We find that admittedly Bombay Dyeing had 19% of the share capital of SCAL and this was continuing since the financial year 2011-12 whereas
Section 129 of the Companies Act, 2013 came into effect from 01.04.2014.
8. Further in the absence of any inducement, prima facie case of fraud is not made out especially when there was no bar for consolidation of
financials.
9. In view of the aforesaid, let a reply be filed by the respondent within three weeks from today. Rejoinder may be filed within three weeks thereafter.
The matter would be listed for admission and for final disposal on January 10, 2023.
10. Considering the fact as to whether the company Bombay Dyeing was obligated to consolidate the financials of its Associate Company SCAL in
view of Section 2(6) of the Companies Act, 2013 read with Section 129(3) of the Companies Act coupled with the fact that there was no diversion of
funds nor there is any finding of any disproportionate gains or loss caused to any investor nor we find that there was any market impact regarding the
financials of the company Bombay Dyeing, we consequently direct that the effect and operation of the impugned order shall remain stayed during the
pendency of the appeal. The stay applications are disposed of.
11. This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally
signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.
