Brightcom Group: SEBI Suggests ED Examination in Overseas Loan Settlement by Ex-CMD Suresh Kumar Reddy
Moneylife Digital Team 01 March 2024
Confirming its interim directions against 20 entities in the Brightcom Group Ltd (BGL) matter, the Securities and Exchange Board of India (SEBI) suggested an examination and action if required by the directorate of enforcement (ED) in the settlement of loans advanced to M Suresh Kumar Reddy, former chairman and managing director (CMD) and his companies abroad through allotment of shares in India. 
In the order, Ashwani Bhatia, whole-time member (WTM) of SEBI says, "The settlement of loans advanced to Mr Reddy and his companies abroad through allotment of shares in India also involved payments in forex through a web of transactions and may involve violation of laws pertaining to dealing in foreign exchanges. It would thus be proper to forward a copy of this order to the ED for their examination and appropriate action, if any."
SEBI confirmed its interim order issued against 20 entities, including BGL, Mr Reddy, Sarita Commosales LLP, Kalpana Commosales LLP, Sahitay Commosales LLP, Shalini Sales LLP, Aradhana Commosales LLP, Palace Heights Avenues LLP, P Bhuvaneswari, Hansraj Commosales LLP, MLS Sudheer, Subrato Saha, Manju Shivkrishna Damani, Varun Shivkrishna Damani, Prerna Varun Damani, Pooja Rajendra Prasad Poddar, Rajendra Prasad Poddar, Sushila Devi Poddar, Ankit Kumar Alya and Sanjib Hirendra Chakraborty.
Modifying the interim order, Mr Bhatia from SEBI says BGL's chief financial officer (CFO) Narayan Raju is barred from holding the position of a director or a key managerial person only with respect to BGL and its subsidiaries.
While revoking its directions against Kishan Prakash and Ishan Prakash, SEBI says shares of BGL, currently held by these two in their demat accounts, will be transferred to any of the demat accounts of Dr Varadarajan Prakash and, after that, a freeze would be marked on these shares in Dr Prakash's demat account till further order. The market regulator also revoked directions issued against Shivkrishna Harakchand Damani and Shankar Sharma.
According to the SEBI investigation, the common thread that emerges is that most noticees have talked about informal lending transactions with Mr Reddy and associates of BGL. "All these appear to be an afterthought and to weave a story that has little merit and creates doubts about the true purpose or intent of the large preferential issues."
"The prima facie findings that the Company had funded its own preferential allotments and had indulged in round-tripping of funds continue to sustain. It has clearly emerged that in case of certain noticees, personal loans advances by them abroad to Mr Suresh Reddy and his private companies or entities were being repaid in India through the mechanism of allotment of shares of BGL, a listed company, in preferential issues for free or at partial consideration, at the cost of public shareholders of BGL," SEBI says.
Further, it says, "What comes out very clearly is the fact that explanations provided by noticees have convinced SEBI to ask even more questions on the way BGL was run and how it was operating as per the whims and fancies of an individual, i.e.  Suresh Kumar Reddy. It is apparent that the Company had loose internal financial controls and its CMD was running the Company as a private concern. The CMD treated BGL as his private enterprise, disregarding the large number of public shareholders and their interests. There were no checks and balances within BGL of the manner in which financial transactions were recorded."
"It is rather strange that private debt of individuals and lending transactions were settled through preferential equity deals. These are more like debt-equity swaps where the unpaid debtor has been compensated by preferential equity allotment. In this process, close friends and associates of Mr Reddy, who were his creditors, were the main beneficiaries," the market regulator says,
According to SEBI, the manner in which LLPs were formed to benefit Mr Reddy is truly baffling. "By nominating himself as a limited partner in the LLPs at a later date, Mr Reddy circumvented SEBI guidelines for promoter lock-in for shares allotted in a preferential issue. Further, it now emerges that these LLPs pledged shares to financial institutions and raised debt on the strength of the same. It is understood that the financial institutions have invoked their pledges and sold the securities. It thus appears that Mr Reddy was advanced money against unpaid shares and by pledging them, he made money without actually paying for them."
In January 2024, while refusing to interfere in an order passed by SEBI, the securities appellate tribunal (SAT) dismissed an appeal filed by Brightcom Group against the order passed by the market regulator. (Read: SAT Dismisses Brightcom's Appeal against SEBI Order Barring Ex-CMD and CFO from Holding Position of Director or KMP
In an order, Meera Swarup (technical member) of SAT says, "...serious allegations have been made against direct involvement of M Suresh Kumar Reddy, chairman and managing director (CMD) and SL Narayan Raju, chief financial officer (CFO) especially with regard to submission of forged or fabricated bank statements to SEBI. Though investigations are ongoing, examination of transactions pertaining to 22 allottees out of 82 allottees of preferential allotments have pointed out to evidence of prima facie diversion of funds by Mr Reddy. In the absence of any evidence to the contrary being filed by the appellants before me, I do not find any lacunae in passing of the impugned order."
SEBI received two complaints on 6 October 2022 and 12 May 2023 about preferential allotments made by Brightcom group in the financial years (FY)19-20 and FY20-21, alleging that the company had raised money through preferential issue of shares to entities that were directly or indirectly connected to it and that the funds raised in the preferential issues were given as loans and advances to its subsidiaries.
SEBI's preliminary findings indicated prima facie irregularities in preferential allotments by the company, including circulation of funds to create the impression of receipt of funds, allotment of warrants or shares without receipt or partial receipt of funds, submission of fabricated bank statements to SEBI and significant misstatements and misrepresentation in the financial statement of the Company. 
SEBI, in its order, says Suresh Kumar Reddy and Narayan Raju were responsible for submitting forged and fabricated bank account statements to SEBI with the intent to mislead the investigation and cover up the irregularities. "The observations and findings clearly show the manipulations carried out by BGL and other noticees, in respect of BGL's preferential allotments, which involve fictitious receipts of the share application money from allottees and siphoning of funds from BGL."
However, the market regulator says BGL has brazenly attempted to cover up its misdeeds by submitting forged and fabricated bank statements to SEBI. "The blatant acts of the company and other noticees raise serious concerns about the affairs of the company and also raise doubts as to whether the financial statements prepared by the company and various disclosures made on the stock exchange platform or in annual reports in the past are correct."
Considering the gravity of the prima facie findings, Mr Bhatia, the whole-time member (WTM) had concluded that urgent intervention by SEBI is warranted and accordingly issued a second interim order on 22 August 2023 in the matter. SEBI barred top executives of the Company, as well as investor Shankar Sharma, from offloading or disposing their shareholding in the Company. 
It says, "There is a real possibility that once this interim order is issued, noticees 4 to 25 may sell the shares allotted to them and make an exit. Thus, they need to be restrained from doing so. In the case of the remaining 60 allottees, suitable action would follow after the examination in respect of them is completed."
SEBI also barred Brightcom's CMD and CFO from holding the position of a director or a key managerial person in any listed company or its subsidiaries until further orders. Following the SEBI order, Mr Reddy and Mr Narayana Raju resigned from the Brightcom group.
Later, they challenged the SEBI order, barring them from holding any position of a director or key managerial personnel (KMP) in any listed company or its subsidiaries. 
SAT, however, says, "I note that the board of directors of the Company were aware of the impending resignation of the other promoter and executive director and his ceasing to participate in board meetings from July 2023. The board was also aware of the resignation of Mr Reddy on 22 August 2023 as a consequence of the directions issued in the impugned order. However, I note that no efforts were made to appoint any executive director in the board to manage the affairs of the Company though almost four months have passed since the impugned order was issued."
"It is made clear that any observation made by this Tribunal in this order is only prima facie and will not be utilised by either of the parties," Ms Swarup from SAT clarified.
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