Market regulator Securities and Exchange Board of India (SEBI) has barred promoters and key managerial personnel of Setco Automotive Ltd (SAL) markets for up to two years citing large-scale diversion and mis-utilisation of company funds, financial misrepresentation and serious corporate governance failures. In a detailed order-cum–show cause notice (SCN), SEBI also directed repayment of diverted funds with interest and imposed monetary penalties totalling ₹28 lakh under the SEBI Act.
The individuals penalised include Harish Sheth (managing director and promoter), Udit Harish Sheth (whole-time director and promoter), Urja Harshal Shah (executive director) and Jatinder Bir Singh Gujral (chief executive officer).
SEBI action follows an examination of Setco Automotive’s financial statements and transactions for the period from FY19–20 to FY21–22. The investigation revealed prima facie evidence that SAL and its wholly owned subsidiary, Setco Auto Systems Pvt Ltd (SASPL), were allegedly used to channel funds to promoter-controlled entities under the guise of marketing commissions, investments and loans, even as the group faced severe financial stress.
According to SEBI, SAL transferred its clutch business its main revenue-generating segment to SASPL through a slump sale for a nominal consideration, without obtaining an independent valuation. A valuation exercise was carried out nearly two years later, raising serious concerns about transparency and fairness. Following this restructuring, SAL and SASPL raised about ₹615 crore from India Resurgence Fund (IRF) through a combination of non-convertible debentures, compulsorily convertible debentures and equity instruments, at an effective internal rate of return of up to 23%.
SEBI alleged that a significant portion of these funds was diverted to promoter-owned Setco Engineering Pvt Ltd (SEPL). More than ₹124 crore was allegedly siphoned off through inflated and unjustified marketing and liaisoning commissions. Of this, ₹107.76 crore was paid as a one-time lump-sum commission, while ₹16.69 crore was paid over multiple years.
The regulator noted that there was no evidence that SEPL provided any such services. The company’s major customers, including Ashok Leyland and Tata Motors, reportedly confirmed that they had no commercial dealings with SEPL, casting serious doubt on the legitimacy of these payments.
SEBI further observed that shareholders were asked to approve these commission arrangements without full and fair disclosure. Investors were allegedly led to believe that SEPL was providing marketing services, while in reality, any such activities were carried out by the promoters themselves. The regulator held that these disclosures were misleading and deprived shareholders of material information.
In addition to commission-related fund diversion, SEBI accused SAL of misutilising funds by investing nearly ₹82 crore in non-convertible cumulative redeemable preference shares of SEPL and advancing funds to another promoter-controlled entity, Transstadia Technologies Pvt Ltd. These investments were repeatedly impaired, no dividends were received and SEBI alleged that the transactions were undertaken to protect promoter interests, including shielding pledged promoter shareholdings, rather than serving SAL’s business objectives.
SEBI also flagged serious disclosure lapses related to the true cost of borrowings from IRF. While SAL disclosed a fixed interest rate of 5% on certain non-convertible debentures, the regulator alleged that the effective borrowing cost, after factoring in redemption premiums, amounted to an internal rate of return of up to 18%. This, SEBI said, was not adequately disclosed, denying investors a clear picture of the company’s financial risk and leverage.
Further violations cited by SEBI include failure to conduct related-party transactions at arm’s length, failure to appoint a chief financial officer within the stipulated timeframe, and false CEO and CFO certifications. Independent directors and audit committee members were also held accountable for failing to exercise due diligence and for approving transactions without adequate supporting documentation.
In its final directions, SEBI ordered Setco Automotive to refrain from any actions that could harm minority shareholders and to ensure fair, accurate and adequate disclosures in all future meeting notices. The noticees were directed to act in a bona fide manner and avoid conduct detrimental to investor interests.
SEBI also directed Harish Sheth and Udit Sheth to jointly and severally repay substantial sums to SAL and SASPL, along with interest at 23% per annum. This includes ₹81.96 crore invested by SAL in SEPL, ₹107.76 crore received as marketing commission, ₹13.07 crore invested in SEPL preference shares and ₹5.98 crore invested in similar instruments of Transstadia Technologies. Any amounts already repaid, along with applicable interest, will be adjusted upon submission of proof.
In addition, SEBI has barred four individuals from accessing the securities market. Harish Sheth and Udit Harish Sheth have been restrained for two years each, while Urja Harshal Shah and Jatinder Bir Singh Gujral have been barred for one year each.
Monetary penalties totalling ₹28 lakh have also been imposed under Section 15HA of the SEBI Act. Harish Sheth has been fined ₹11 lakh, Udit Sheth ₹6 lakh, Urja Shah ₹6 lakh and Mr Gujral ₹5 lakh.
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