SEBI Penalises 5 Ex-directors of Bombay Dyeing, Others over Alleged Due Diligence Lapses
Moneylife Digital Team 02 November 2022
The Securities and Exchange Board of India (SEBI) has penalised five former independent directors of Bombay Dyeing and Manufacturing Company (BDMCL) including Ishaat Hussain and SS Kelkar with a total fine of Rs59 lakh for alleged failure to carry out adequate due diligence and exercise independent judgement as members of the audit committee.
The other independent directors who have been fined are RA Shah, S Ragothaman and SM Palia.
The regulator has also penalised three former chief financial officers of the company including Vinod Hiran, Puspamitra Das and Vishnu Peruvamba, for certifying that the financials of Bombay Dyeing, presented a true and fair view of its affairs and did not contain any misleading statement.
SEBI conducted an investigation to ascertain whether the books of accounts of the company were manipulated for the financial years FY2011-12 to FY2018-19.
The investigation revealed that Bombay Dyeing had entered into various memoranda of understanding (MoUs) with Scal Services, a group company whose entire shareholding was directly and indirectly held by BDMCL. During FY11-12 to FY17-18, the revenues were recognised on the basis of the MoUs and not consolidating the transactions with Scal, which inflated the sales and profits of BDMCL’s real estate business to the tune of Rs2,492.94 crore and Rs1,302.20 crore respectively, SEBI said.
Scal  did  not  have  any  independent  office  during  the  investigation period  and  operated  from  “Neville  House, JN Heredia Marg, Ballard  Estate, Mumbai-400 001” which was owned by BDMCL without paying any rent/ lease charges. Furthermore, the directors of Scal namely, DS Gagrat, R Chandrasekharan, NH Datanwala and Shailesh Karnik were also directors in other Wadia  group  companiesand  admittedly, none  of  the  directors  received  any remuneration for their role as directors of Scal which shows that they were directly/ indirectly controlled by Scal.
The regulator said that the company executed a scheme with Scal where it artificially inflated its sales and profits by booking non-genuine sales of flats in Project One ICC and Project Two ICC at Dadar, Mumbai under 11 MoUs. 
Despite Scal having negative net worth throughout financial years 2011-12, 2012-13 and 2013 -14 i.e. Rs3 crores, Rs14 crores and Rs42 crores, BDMCL entered into total 11 MoUs wherein Scal was expected to make a payment of Rs2,290 crore over several years. The payment made by Scal towards the booking amount under the MoUs was financed through borrowings from various group companies of BDMCL and through external entities such DHFL, based on the intervention of BDMCL.
BDMCL providing a comfort letter to DHFL for extending a loan of Rs534.8 crore to Scal with a commitment to not dispose its shareholding in Scal till the loan is repaid, in its capacity as a shareholder and not as a developer. This indicates that BDMCL was, in fact, in control of Scal. It is based on the faith of that letter, DHFL sanctioned the aforesaid term loan to Scal, an entity whose net worth was Rs237.70  crore (negative) as on 31 March 2017 and which was making losses since the past several years. 
SEBI held that the ex-directors  failed to carry out adequate due diligence and exercise independent judgement as members of the audit committee of a listed company  to ensure that financial statements are free from material misstatement thus violating many laws.
In its order, SEBI noted “…. CFOs are expected to ensure compliance with the financial reporting... In this role, the CFO is also required to communicate with the investors in a fair and transparent manner and thereby, enhance the investor’s trust and confidence. Therefore, the CFOs have a critical role to play in the  scheme  of  the  things  under  the  erstwhile  Listing Agreement  and  the  LODR Regulations.” Based  on  the  analysis,  SEBI highlighted that the noticees  had clearly violated the duty cast upon them.
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