January 16, 2025

“Uncovering Regulatory Authority: Understanding the Sources of Regulatory Action” - MMJC

Introduction:

Regulatory actions are common when it comes to corporate world. In a disclosure-based regime information is easily available to regulators to identify non-compliance. Disclosures based regime here not only envisages disclosures made by listed companies to stock exchange for compliance with certain laws but also includes income tax return filed by companies with tax authorities, tax returns filed by various entities forming of listed entities with tax authorities, indirect tax returns filed by listed companies etc. Even if these returns are filed for a specified purpose of complying with income tax, indirect tax etc but still they are source of information that can be useful to regulators. Financial and other regulatory authorities have started sharing this data with other regulatory authorities.

In this article we shall see cases wherein such breaking of inter regulatory silo is seen. Also, we shall see what various avenues from which information is received by SEBI for enforcement.

1. References by Income Tax department:

Securities and Exchange Board of India (SEBI) has signed a Memorandum of Understanding (MoU) with Central Board of Direct Taxes (CBDT), Government of India, today, for data exchange between the two organizations. This MoU will facilitate the sharing of data and information between CBDT and SEBI on an automatic and regular basis. The MoU will ensure that both CBDT and SEBI have seamless linkage for data exchange[1]. SEBI has received numerous references from Income Tax department with respect to certain companies or individuals with respect to alleged violations of various SEBI regulations. Details of same are as follows:

Reference received in the matter of ABG Shipyard Ltd: In the matter of ABG Shipyard Ltd SEBI had received letter from Income Tax department dated October 24, 2013, whereby it was informed that ABG Shipyard Ltd along with its promoter group entity Second Land Developers Pvt. Ltd. known as ‘ABG Resources Private Ltd.’ had approached Income Tax Settlement Commission (‘ITSC’) and in the proceedings before the ITSC, ABG had submitted that it had debited bogus purchases to its accounts and the money so taken out was applied towards purchase of land through number of companies including SLDPL. Thus, the funds to the tune of ₹101 Cr had been admittedly diverted by ABG for making investments in other companies controlled by its promoters[2]”. The matter was referred to SEBI for ascertaining whether this would have led to violation of any SEBI regulations. SEBI then took up the investigation in this matter.
Reference received in the matter of Maitreya Services Private Ltd: SEBI received similar reference in the matter of Maitreya Services Private Ltd and two ors vide letter dated September 21, 2010 from the Income Tax Department informing it of suspicious transactions in the nature of running an unregistered Collective Investment Scheme by M/s Maitreya Services Private Limited, resulting into serious contraventions of various provisions of the Securities and Exchange Board of India Act, 1992 and Regulations made thereunder. The Income Tax Department also forwarded certain documents including copies of statements of Mrs. Varsha Madhusudan Satpalkar, a director of M/s. Maitreya Services Private Limited. On perusal of the reference received from the Income Tax Department, SEBI carried out examination of the activities and operations of M/s. Maitreya Services Private Limited by examining the memorandum and articles of association of the Maitreya Services Private Limited, details of its present and past directors, details of various schemes / offers made to the public, relevant application forms submitted and registration letters issued thereunder, details of funds mobilized from investors under those schemes / offers, details of regulatory approvals obtained etc. Examination prima facie revealed the activities of the Maitreya Services Private Limited to be in the nature of unregistered collective investment scheme[3]. SEBI then conducted a detailed an investigation and passed an order in this matter.
Reference in the matter of Nouveau Global Ltd: SEBI received references from Department of Income Tax alleging manipulation and bogus Long Term Capital Gains in the scrip of Nouveau Global Ventures Limited (‘NGVL’). Thereafter, SEBI conducted an investigation with respect to the alleged irregularities in the scrip of NGVL during the period from December 01, 2010, to March 28, 2013. SEBI observed that certain entities including Pavan Roller Flour Mills Private Limited, which was one of the promoters of NGVL at the relevant time, had transacted in the scrip of the NGVL on multiple occasions, during December 01, 2010, to March 28, 2013. SEBI further observed that in respect of share transactions carried out by Noticee, it had failed to make requisite disclosures in terms of applicable SEBI regulations[4].

So, it is not only the information that is filed with SEBI or disclosed to stock exchange, but any irregularities found in disclosures made to various other regulators can lead to initiation of investigation by any regulator.

2. Reference by National Financial Regulatory Authority:

SEBI received a financial reporting quality review report dated February 14, 2022, from National Financial Reporting Authority in the matter of Prabhu Steel Industries Limited wherein it noted serious lapses with respect to accounting and auditing standards. On receipt of the said report, SEBI conducted an investigation to ascertain if there was misrepresentation in financial statements of PSIL[5].

3. Reference received through SCORES:

Related Party Transactions in the matter of Williamson Magor and Company Ltd: SEBI received a complaint through SCORES, inter-alia alleging that Williamson Magor and Company Ltd, entered into a related party transaction with Babcock Borsig Ltd., its associate company, involving sale of 1,13,360 shares of Woodlands Multispecialty Hospital Ltd. It was alleged that the transaction was undertaken without corporate approvals and without making appropriate disclosures under the accounting standards. The complaint was being dealt with, on the SCORES platform and later converted into a case and dealt with offline[6].
Wrongful inclusion of name as promoter or promoter group: SEBI received a complaint no. SEBIE/MH19/0007594/1 dated November 25, 2019 on SCORES platform from one entity Mr. Sunil Goel (hereinafter referred to as ‘the Complainant’) referred to wrongful inclusion of his name in the list of promoter/ promoter group entities which had led to subsequent freezing of the complainant’s demat accounts and a plea for reclassification of his status as a promoter[7].
Maintenance of minimum public shareholding: In the matter of Jaya Krishna Taparia on 4th June, 2014, SEBI received a complaint on the SCORES platform alleging that the Company had failed to comply with Rule 19A of the Securities Contract Regulation rules, 1957 and had moved some of the promoters to the public category thereby cheating its shareholders. Pursuant to an enquiry SEBI passed an ex-parte ad-interim order dated 20th May 2015 issuing certain direction which has already been extracted aforesaid on the ground that the appellant Company had failed to meet the minimum public shareholding requirements[8].
Failed to file accurate, adequate and explicit disclosures under reg. 30 and various other filings: In separate two instances SEBI conducted an examination in the matter of AGI Greenpac Limited based on the complaints received from Soneko Marketing (P) Ltd and HNG Industries Thozhilalar Nala Sangam[9] and upon receipt of a complaint dated August 15, 2020 against the Perfect Octave Media Projects Limited, conducted an examination and based on the findings of examination, SEBI initiated adjudication proceedings against Perfect Octave Media Projects Limited[10]. In both these compliants received by SEBI it was highlighted that the respective companies had failed to file accurate, adequate, and explicit disclosure under Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 with stock exchange.

3. Reference received through Goods and Service Tax Authorities:

As per the corporate announcement made by the LEEL Electricals Ltd on May 08, 2017, the CD business was acquired by Havells India Ltd. (Havells) for a consideration of Rs. 1550 Crore. Subsequent to the said transaction, SEBI received a complaint dated November 13, 2018, from a shareholder of the Company, inter alia alleging that promoters and the senior management of the Company have diverted funds including the funds received from the sale of the CD business. SEBI also received a letter dated February 15, 2019, from the Office of the Commissioner for Central Goods and Service Tax which inter alia stated that LEEL had availed GST input tax credit of Rs. 40.53 Crore against reported purchase of material amounting to Rs. 225.19 Crore without actually receiving any goods and without any underlying financial transactions. The letter also mentioned that the Whole Time Director and Chief Financial Officer of LEEL had admitted in a statement filed before the High Court of Rajasthan that the company had entered into such transactions to show an increase in the volume of turnover[11]. With this information SEBI investigated the matter and penalised the guilty.

4. Reference received through the Institute of Chartered Accountants of India:

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) had received a reference from the Institute of Chartered Accountants of India (“ICAI”) dated April 28, 2023, against Kaarya Facilities and Services Limited (“Noticee 1”/ “Company” / “Kaarya”). The ICAI has, inter-alia, observed number of irregularities in the financial statements of Noticee 1 for Financial Year 2018-19 and requested SEBI to take appropriate action in the matter[12].

5. References are received through certifications given by professionals or quarterly compliances with SEBI.

SEBI conducted an investigation into the disclosures made by Nutricircle Ltd on receipt of a report from a merchant banker. Merchant banker had prepared a document dt: January 18, 2023, regarding the compliance of LODR Regulations while delating with open offer made by certain acquirers in the scrip of Nutricircle[13].

Conclusion:

It is necessary to understand that not only disclosures made under SEBI regulations are sources of information for SEBI. As seen above, the watchdog also draws inferences from information shared or returns filed under various other laws and regulations. This broader data ecosystem enhances its ability to gather insights and conduct thorough regulatory oversight, demonstrating the importance of a comprehensive and integrated approach to information sharing among regulatory entities. It underscores the complexity and interconnectedness of regulatory functions, highlighting the need for seamless information sharing and coordinated actions among regulatory bodies to uphold market integrity and safeguard investor confidence.Top of Form

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023970/uncovering-regulatory-authority-understanding-the-sources-of-regulatory-action-experts-opinion

This article is written by CS Vallabh M Joshi – Senior Manager – vallabhjoshi@mmjc.in

[1] https://www.sebi.gov.in/media/press-releases/jul-2020/sebi-signs-mou-with-cbdt_47030.html

[2] https://www.sebi.gov.in/enforcement/orders/dec-2019/adjudication-order-in-respect-of-5-entities-in-the-matter-of-abg-shipyard-limited_45499.html

[3] https://www.sebi.gov.in/enforcement/orders/nov-2018/adjudication-order-in-respect-of-three-entities-in-the-matter-of-maitreya-services-pvt-ltd-_41195.html

[4] https://www.sebi.gov.in/enforcement/orders/jun-2021/adjudication-order-in-the-matter-of-nouveau-global-ventures-limited_50648.html

[5] https://www.sebi.gov.in/enforcement/orders/apr-2024/adjudication-order-in-the-matter-of-prabhu-steels-limited_82865.html

[6] https://www.sebi.gov.in/enforcement/orders/apr-2024/adjudication-order-in-the-matter-of-williamson-magor-and-company-limited_82864.html

[7] https://www.sebi.gov.in/enforcement/orders/feb-2021/adjudication-order-in-the-matter-of-real-growth-commercial-enterprises-limited_49114.html

[8] https://sat.gov.in/english/pdf/E2021_JO2019435_55.PDF

[9] https://www.sebi.gov.in/enforcement/orders/apr-2024/adjudication-order-in-the-matter-of-agi-greenpac-limited_83117.html