The Securities and Exchange Board of India (Sebi) has declared that it has the legal authority to lift the corporate veil and ascertain the truth when the interests of investors are jeopardized or could be endangered. This statement was made during the proceedings of the Bombay Dyeing case before the Securities Appellate Tribunal (SAT). In this case, Sebi is contesting Bombay Dyeing’s petition against its October 2022 order that banned the company, its promoter Nusli Wadia, and several others from participating in the capital market.
The order issued by Sebi in October 2022 also imposed a penalty of ₹15.75 crore on Bombay Dyeing & Manufacturing for alleged fraud related to the falsification of the company’s financial statements.
During the hearing, Gaurav Joshi, senior counsel for Sebi, argued that the Securities and Exchange Board of India Act (Sebi Act) empowers the regulatory authority to take actions in the interest of safeguarding the investors’ interests. Therefore, the act of lifting the corporate veil to identify those who control a regulated entity is within Sebi’s legal purview. Joshi emphasized that without such authority, Sebi would be unable to address many corporate misdeeds that could jeopardize investors’ interests.
He cited a previous SAT order in the case of Sahara Asset Management Co. and Ors. vs. Sebi, which upheld Sebi’s authority to protect investors’ interests by lifting the corporate veil when necessary.
Joshi informed the court that between 2011-12 and 2017-18, Bombay Dyeing falsely inflated its profits by allegedly selling apartments to Scal Services Ltd., another Wadia Group firm, as part of a memorandum of agreement. This resulted in an overstatement of profits by ₹1,302 crore and sales by ₹2,493 crore. He further asserted that the company’s promoters were aware of these transactions and that they were not genuine.
One of Bombay Dyeing’s main contentions was that the company did not directly deal in securities, and therefore, violations of the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) regulations should not apply to them.
Citing the Supreme Court case of Sebi vs. Kanhaiyalal Baldevbhai Patel, the senior counsel argued that even if an entity is not directly involved in securities trading, it can still be held liable for PFUTP violations if it deals with securities-related information or misinformation that affects others in the market.
The Bombay Dyeing case has significant implications for Sebi’s ability to take action against entities that may not directly trade in securities but are involved in activities that impact the securities market and investors’ interests. The outcome of this case will clarify the extent of Sebi’s authority in such matters and its ability to protect the interests of investors in the Indian capital market.
Investor protection and market integrity are paramount in financial regulatory matters, and Sebi’s assertion of its statutory authority to lift the corporate veil underscores its commitment to upholding these principles.