The story so far: On October 22, the Securities and Exchange Board of India (SEBI) barred ten entities, including The Bombay Dyeing & Manufacturing Company Ltd (BDMCL) and its promoters Nusli Wadia, Ness Wadia and Jehangir Wadia from trading in the securities market for a period of two years. This was on account of alleged financial misrepresentation made by the entities with respect to their real-estate business. The market regulator also imposed a fine of ₹15.75 crore on the entities.
Bombay Dyeing has three verticals — home textiles, real-estate and polyester staple fibre (PSF). The investigation concerned their management of real-estate operations. The Wadia Group Company, Scal Services Ltd was engaged in the business of real-estate and trading. In February 2019, Scal’s real estate business was demerged and vested into the BDMCL. It was in March 2012 that BDMCL had sold a 30% stake in Scal — reducing its individual shareholding in the company to 19%.
SEBI’s conclusions are thus inter-related. Firstly, it found BDMCL guilty of abetting a scheme that would fall short of recognising Scal as an ‘associate’ and secondly, of using the premise of an indirect ownership scheme to incorrectly project profits. Accounting Standard-23 (or AS-23) requires a company to recognise its investments in an associate in order to ensure transparency for a retail investor who might invest in their company. Unless specifically established, an entity is to be categorised as an ‘associate’ to the main entity should the latter hold 20% or more shareholding in the former. As previously stated, BDMCL kept it at 19%, thus, allegedly escaping the necessity for regulatory disclosures. SEBI noted that Wadia Group’s other companies held the remaining shareholding of Scal.
To summarise, the regulator observed that BMDCL directly or indirectly held the entire share capital of all the entities which held share capital in Scal.
How was it to be executed?
In a nutshell, the scheme entailed BDMCL selling flats and allotment rights to Scal (whose ownership was allegedly retained by the group) and ensuring that it continued to recognise the revenues based on certain Memorandum of Understandings (MoUs), irrespective of whether or not the properties were further sold to retail customers by Scal. In other words, BDMCL could tell investors about having made a sale wherein in fact, it was allegedly just passing it on to an ‘in-house’ entity. The agreements recognised Scal as a ‘bulk purchaser’, and as per the formulated model, it was required to sell these apartments to retail customers and make payments to BDMCL. However, as noted by the regulator, while BDMCL recognised the sales made to Scal in its financial statements, this was not the case with Scal. The latter only recorded the difference between sales and purchase of flats, similar to a commission. Thus, SEBI concluded that Scal was “acting as an agent of BDMCL rather than acting on principal-to-principal basis”.
What were the consequences of this alleged misrepresentation?
The regulator noted that had the financial statements of Scal been consolidated (with the main company), the inter se sales of flats from BDMCL to SCAL would not have been accounted for and therefore the ‘sales’ and ‘profit’ figures of BDMCL would have been reduced. As per SEBI, BDMCL was able to inflate its sales by ₹2,492.94 crore and consequently profit by ₹1,302 crore between FY 2011-12 to FY 2017-18. Thus, it was able to present itself as a profit-making enterprise.
This, advertently, helped maintain its share price.