Market Regulator Securities and Exchange Board of India (SEBI) imposed a penalty of Rs34 crore on Brightcom Group Ltd (BGL) (noticee 1), the company promoters, and other key individuals involved in financial misreporting. BGL promoters M Suresh Kumar Reddy, former chairman and managing director (CMD) (noticee 2) and Vijay Kancharla (noticee 3) faced the heaviest penalties, each fined Rs15 crore. Additionally, both have been banned from the markets for five years.
Mr Reddy and Mr Kanchrla are also prohibited from holding any position as a director or key managerial personnel (KMP) in a listed company or any SEBI-registered intermediary for the same period.
Besides the primary promoters, SEBI also levied fines on other key individuals associated with the company. Y Srinivasa Rao (noticee 5) was fined Rs2 crore, while BGL and Yerradoddi Ramesh Reddy (noticee 4) were each fined Rs1 crore. Moreover, these individuals are restricted from participating in the securities markets for one year. Further, Yerradoddi Reddy and Mr Rao have been barred from serving as directors or KMPs in any listed company or SEBI-registered intermediary for one year.
In an order, Ananth Narayan G, whole-time member (WTM) of SEBI, noted, "Considering the long period during which the misstatements continued and the persistent non-cooperation with SEBI's investigation and the multifarious violations of law perpetrated by the noticees, I am of the view that stringent remedial and penal directions are warranted in this case. Since the fraudulent scheme was evidently designed to benefit the promoter directors who offloaded a large portion of their shares, and taking into account their roles as CMD and whole-time directors (WTDs) in the listed company, I am of the view that noticees 2 and 3 (Mr Reddy and Mr Kancharla) deserve a more stringent penalty and directions of restraint, in comparison to the other noticees."
"Next, Y Srinivasa Rao (noticee 5) functioned as an employee and chief financial officer (CFO) of BGL for the entire impugned period of six years and was responsible for preparing the financials during this period. Next, in the case of Yerradoddi Ramesh Reddy (noticee 4), facts bear out that he was an executive director (ED) and audit committee member for only three years during the impugned period and the violations arising from incorrect impairment of assets post the general data protection regulation (GDPR) notification all took place after his tenure as ED and audit committee member. Nonetheless, he bears responsibility for other accounting standard irregularities and LODR violations elaborated in this order. Finally, in my view, BGL deserves comparatively lesser penalty and period of restraint for the reason that it is now largely owned by public shareholders who have borne the brunt of the fraud perpetrated by the promoter directors," the SEBI order says.
SEBI investigation was initiated following multiple complaints received between October 2020 and March 2021. Based on these complaints, SEBI issued an interim order and show-cause notice on 13 April 2023, against BGL and its promoters.
The notice highlighted allegations of misstatements, accounting fraud, and disclosure violations for the financial years between 2014-15 and 2019-20. Further scrutiny confirmed that these irregularities were part of a deliberate scheme to mislead investors and facilitate the promoters' exit at inflated stock prices.
SEBI's investigation revealed significant accounting discrepancies in the company's financial records from FY14-15 to FY19-20.
According to SEBI's WTM these violations led to egregious misrepresentation of the company's financial statements. "One of the most alarming findings was the artificial inflation of the company's headline profits by Rs1,280 crore during FY18-19 and FY19-20. Additionally, there was a considerable delay in recognising material impairments in the company's assets. Such misreporting distorted the actual financial position of the company, misleading investors and other stakeholders."
To address these irregularities, SEBI directed BGL to disclose its subsidiaries' standalone financial statements publicly on its official website. This requirement applies to financial records spanning from FY14-15 to FY21-22 and must be fulfilled within 15 days from the issuance of the regulatory order.
The regulator's findings indicate that several key individuals, including Mr Suresh Reddy, Mr Kancharla, Mr Yerradoddi Reddy, and Mr Rao, were actively involved in the approval and execution of these financial misstatements. These individuals held crucial roles such as executive directors, audit committee members, and KMP at various points during the period under review. Their positions within the company made them directly responsible for the firm's day-to-day affairs and financial disclosures.
SEBI's investigation further revealed that the accounting irregularities facilitated the promoters' offloading of their stakes in the company. Between March 2014 and June 2022, the promoter group reduced its shareholding from 40.45% to just 3.51%. This drastic reduction raised suspicions that the promoters took advantage of inflated financial statements to exit at higher stock prices, reaping significant financial benefits at the expense of retail investors.
Among those implicated, Mr Suresh Reddy and Mr Kancharla were found to be key participants in the promoter group's share-offloading strategy. SEBI's order states that these individuals directly manipulated financial statements and disclosures, ultimately deceiving investors.
The actions of BGL and its promoters and executives were found to be in clear violation of SEBI's Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) regulations.
Last year in March, confirming its interim directions against 20 entities in the BGL matter, SEBI suggested an examination and action, if required by the directorate of enforcement (ED) in the settlement of loans advanced to Mr Reddy, the former CMD of BGL and his companies abroad through allotment of shares in India.
In May 2024, taking a stern view of non-cooperation by the audit firm and a chartered accountant (CA)-cum-engagement partner (EP) of BGL, the national financial reporting authority (NFRA) imposed an Rs80 lakh penalty while barring both from taking up audit assignments for two years and 10 years, respectively. NFRA slapped a penalty of Rs50 lakh on PCN & Associates, the audit firm, and Rs30 lakh on CA Gopala Krishna Kandula, the EP, for not submitting the requisite documents and information for Brightcom group's audit for FY19-20 to FY21-22. (
Read: Brightcom Group: NFRA Slaps Rs80 Lakh Penalty on PCN & Associates and CA Gopala Krishna Kandula for Non-cooperation in Probe)
