27 January 2026
Mr Bhushan Shah, Partner & Mr Abhishek Nair, Associate
Overview:
The Securities Appellate Tribunal (SAT) in four appeals in the Bombay Dyeing and Manufacturing Company Limited vs SEBI matter has set aside SEBI’s Orders dated 21 October 2022 passed by the Ld Whole Time Member and 31 October 2022 passed by the Ld Adjudicating Order, imposing penalties and restraints on Bombay Dyeing and Manufacturing Company Limited (Bombay Dyeing), its promoters, directors, and related entities. The majority of members of SAT, comprising the two Technical Members, have held that the Memorandum of Understanding (MoU) executed between the Company and its group company, SCAL Services Limited (SCAL), did not constitute fraudulent or unfair trade practices, as there was no evidence of intent to deceive investors or manipulate the market.
Brief Background:
Bombay Dyeing, a Wadia Group flagship engaged in real estate, polyester, and textile manufacturing with shares listed on BSE and NSE, entered into 11 MoUs with SCAL between 30 March 2012 and 27 March 2014. These MoUs facilitated the bulk sale of allotment rights for 325 flats in Bombay Dyeing’s leading project – One ICC and Two ICC, with a total consideration of ₹3,033 crore. Bombay Dyeing recognised revenue of ₹2,492.94 crore (56% of its real estate segment total of ₹4,429.57 crore) and profit before tax of ₹ 1,302.20 crore from FY 2011-12 to FY 2017-18, applying the percentage-of-completion method under Accounting Standard-7. SCAL subsequently resold the flats to end-buyers, recording profits or losses accordingly. In 2019, SCAL’s real estate undertaking was demerged into Bombay Dyeing per a National Company Law Tribunal order. In 2017-18, following investor complaints alleging improper accounting, SEBI investigated, issued show-cause notices, and thereafter passed the orders imposing penalties and other directions for alleged fraudulent inflation of financials.
Appellants Contention:
The appellants contended that the MoU represented genuine commercial transactions for bulk sales in ongoing real estate projects, with revenue recognition in compliance with Accounting Standard-7 based on project milestones and an initial 10% booking amount. They further emphasised that SCAL’s stake dilution to 19% in 2012 removed it from related-party status under SEBI norms, rendering the deals arm’s-length. Disclosures were made in financial notes, audited by independent firms without objections, and all flats were constructed and sold to third parties, evidencing economic substance. The appellants also highlighted SEBI’s nine-year delay in action, which prejudiced their defense, and argued that no intent to
investors existed.
SEBI’s Contention
SEBI asserted that the MoUs were sham arrangements that lacked genuine risk transfer or cash flows, were designed to front-load revenues and profits for Bombay Dyeing without economic reality, and thereby misled investors and violated Regulation 3 of the PFUTP Regulations. It classified SCAL as a related party under BDMCL’s indirect control, noting the transactions’ circular nature within the group and SCAL’s negative net worth. SEBI claimed the artificial inflation lured investors, constituting market abuse, and imposed penalties totaling over ₹15 crore alongside debarments of one to two years, without conducting a price-impact analysis.
SAT’s Majority Decision:
The majority, comprising the Technical Members, found that, while the projects and MoUs existed and the transactions materially affected reported revenue, the record did not establish a single, continuing fraudulent scheme of the kind SEBI alleged. The majority noted that similar MoU arrangements had been used in past projects without adverse findings, sales to unrelated third parties were recorded on similar terms, and shared group infrastructure and cross-holdings alone did not prove sham transactions. Following a detailed review of the agreements, income accounting under the relevant standard, the reduction in ownership of the related entity, and disclosures concerning affiliated parties, the majority determined that no aspects of the claimed deceptive plan were substantiated. They further noted that no substantiation existed for the claims of influencing stock values or attracting investors through exaggerated earnings. As a result, the appeals were allowed, the Impugned Orders were set aside, fines were ordered to be returned within four weeks.
Separate view by the Presiding Officer of SAT:
The Presiding Officer, in his dissenting opinion, emphasized SCAL’s negative net worth, minimal actual payments, the timing of nine MoUs during a construction stay, and extensive group support in the form of loans, comfort letters, etc, and concluded the transactions were ex facie non-genuine and that Bombay Dyeing’s financials were inflated. The Presiding Officer considered that the agreements failed to demonstrate legitimate transactions between independent parties, as the related entity effectively operated on behalf of the main company despite the lowered stake, resulting in fabricated income increases. He pointed out that reporting earnings of ₹1,302.02 crore seemed evidently inaccurate on its face.
MHCO Comment:
This case presents a highly controversial and fact-sensitive issue at the intersection of aggressive accounting practices and regulatory oversight of related-party transactions. The split verdict of the SAT, with the majority setting aside SEBI’s penalties and the Presiding Officer dissenting, underscores the complexity and significance of the questions involved. Given the divergent views within SAT and the broader implications for listed entities and
market regulation, it is highly likely that this matter will be carried to the Supreme Court. The Supreme Court’s eventual decision will be crucial in clarifying the threshold for establishing fraudulent intent under the PFUTP Regulations and will provide much-needed certainty for companies navigating intra-group transactions and disclosure obligations.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us for any assistance.