TaxTMI 
TaxTMI 
TaxTMI 
2025 (6) TMI 1673
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.... disclose events and circumstances that led to impairment loss 45 (ii) Impairment loss of investment in subsidiary amounting to INR 411.76 crores in FY 2018-19 46 (a) BGL failed to recognize impairment loss in its standalone financial statement 49 (b) BGL recognized impairment of assets of INR 411.76 crores in FY 2018-19 under OCI in contravention of applicable accounting standards 51 (c) BGL failed to disclose events and circumstances that led to impairment loss 52 PART II: Other accounting standards violations 55 (i) Wrong capitalization of R&D costs as assets 55 (ii) Incorrect recognition of intangible assets 61 (2) Whether BGL has violated various other provisions of the Listing agreement/ LODR Regulations? 65 A. NOT DISCLOSING THE INITIATION OF FORENSIC AUDIT TO STOCK EXCHANGES 65 B. INCONSISTENT DISCLOSURE OF SHAREHOLDING PATTERN 67 C. ISSUING A FALSE AND MISLEADING PRESS RELEASE ON APRIL 10, 2018, WITH RESPECT TO APPOINTMENT OF INTERNAL AUDITOR 70 D. DID NOT CARRY OUT LIMITED REVIEW OR AUDIT OF QUARTERLY RESULTS FOR THE FY 2019-2020 72 E. DID NOT ENSURE THAT THE CONSTITUTION OF ITS AUDIT COMMITTEE WITH EFFECT FROM OCTOBER 01, 2014 IS IN ACCOR....
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....Securities Contracts (Regulations) Act, 1956 ("SCRA"). 3. Brightcom claims to be a leading global provider of comprehensive online or digital marketing services to direct marketers, brand advertisers, and marketing agencies. The Company is divided into three major divisions: (i) media (ad-tech and digital marketing), (ii) software services, and (iii) future technologies, and has subsidiaries and operations in various geographies including in the US, Israel, Latin America, Western Europe and Asia Pacific regions (25 office locations and 1700 employees and consultants). The Company is headquartered in Hyderabad, India. As per the Company's Annual Report for the FY 2019-20, it has 2 Indian subsidiaries and 14 overseas subsidiaries. The present promoters of the Company had taken over the erstwhile listed company, Lanco Global Systems Ltd., and amalgamated it with an unlisted company, Ybrant Digital Ltd., through a scheme of amalgamation approved by the Hon'ble High Court of Andhra Pradesh dated April 11, 2012. Pursuant to the same, the Company's name was changed from "LGS Global Ltd." to "Ybrant Digital Ltd." with effect from June 14, 2012. Later, the Company's name was changed to "Ly....
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.... Regulation 4(1)(a), (b), (c), (d) (e), (g), (h), 3. Recognizing impairment of assets under "Other Comprehensive Income" instead of recognizing it in profit and loss. Ind AS 36 (FY 2018-19, FY 2019-20) 4. Transferring "Intangible Assets under development" and "Capital Work-in- Progress" to "Intangible Assets" once a year instead of as and when the asset recognition criteria is met. AS 26 (FY 2014-15 & 2015-16) and Ind AS 38 (FY 2016-17 to FY 2019-20) Clauses 49 (I)(C)(1)(a) and 50 of the erstwhile Listing Agreement for the FY 2014- 15 and regulation 4(1)(a), (b), (c), (d) (e), (g), (h), (i), (j), 4(2)(e)(i), 33(1)(c) & 48 of LODR Regulations for the FYs 2015-16 to FY 2019- 20. 7. Violations of LODR Regulations by BGL: Table no. 2 # Alleged violation Provisions violated 1. Not disclosing the fact of the initiation of forensic audit to stock exchanges. Regulation 30 (1), (2) and (6) read with Clause 17 Schedule III Para A of Part A LODR Regulations. 2. Submitting incorrect and misleading quarterly shareholding pattern to the stock exchanges for 31 out of 34 quarters during the period March 31, 2014 to June 30, 2022. Clause 35 of the erstwhile listing agreeme....
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....o FY 2019-20) (for failure to perform obligations as directors). Additional provision attracted by Mr. M. Suresh Kumar Reddy: Clause 49(IX) of the erstwhile Listing Agreement (For the FY 2014-15) & Regulation 17(8) of SEBI (LODR) Regulations, 2015 (For the FYs 2015-16 to FY 2019-20) (for being the signatory to CEO/CFO certification). Additional provision attracted by Mr. Vijay Kancharla: Regulation 18(3) read with Part C of Schedule II of the LODR Regulations (for failure to perform duties as member of audit committee). 2. Mr. Vijay Kancharla Whole-Time Director (Promoter) 26/06/2012 Continuing* 3. Mr. Yerradoddi Ramesh Reddy Independent Director 26/06/2012 09/05/2016 Regulations 4(2)(f)(i)(2), 4(2)(f)(ii)(2)(7)(8), 4(2)(f)(iii)(1)(2)(3)(6)(7)(12) of SEBI (LODR) Regulations, 2015 (for failure to perform duties as directors). Clause 49III D of erstwhile Listing Agreement and Regulation 18(3) read with Part C of Schedule II of the LODR Regulations (for failure to perform duties as member of audit committee). Regulations 4(2)(f)(i)(2) of LODR Regulations r/w Section 27(2) of the SEBI Act and Section 24 of SCRA (for failure to perform duties as CFO). Ex....
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....nce BGL has subsidiaries across the globe and a minor change in any policy could have cascading effect. The accounting policy followed by BGL is also followed by its peers due to peculiarity of the business. The same is also disclosed in the annual report on the regular basis. (ii) Further, the board of BGL carefully reviews financial statements to ensure that they are prepared in accordance with the applicable accounting standards and regulations. They also ensure that the financial statements are audited by independent auditors in a timely and accurate manner. (iii) BGL invested heavily in R&D to enhance their product and platform offerings. BGL had capitalized its R&D costs, recognizing them as intangible assets in its balance sheet. This decision was based on the managements' judgment that the R&D expenses incurred are likely to generate future economic benefits for the company. By capitalizing its R&D costs, BGL amortized these expenses over the assets useful life, providing a more accurate reflection of its financial performance and ensuring that its financial statements accurately reflect the economic reality of the business. (iv) In the IT product development industry....
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.... of upgrade was substantial. Hence, it was a one-time extraordinary item (due to change in law). The BGL audit committee recommended that all products be tested for impairment at their respective locations. This exercise was conducted in FY 19- 20, and all subsidiary financials made provision for impairment in that year. (iii) Write-off of loans and advances is the recognition of a loss when the possibility of recovering the principal and interest on the loan or advance is remote. Write-offs are usually specific to a particular loan or advance, and result in the recognition of an expense in the income statement. The write-off of a loan or advance does not necessarily trigger an impairment of other assets in the company's financial statements. (iv) For recording of subsidiary loss, the company has followed the prescribed process of consolidating financial statements in accordance with Ind AS 110 and has duly recorded any losses incurred by its subsidiaries in the consolidated financial statements. BGL has disclosed all relevant information regarding the impairment of investment/loan to subsidiaries amounting to INR 411.76 Crores in FY 2018-19. The loss on investment, which w....
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....tures. (iii) As per Ind AS 36, "Impairment of Assets," an entity can recognize impairment losses in OCI or in the profit and loss account, depending on the nature of the asset and the expected impact of the impairment on the entity's financial performance. (iv) When it comes to impairment losses of subsidiaries, Ind AS 36 does not explicitly state whether such losses should be recognized in the parent company's profit and loss account or in OCI. This is because the determination of whether such losses should be recognized in the parent company's profit and loss account or in OCI requires judgement and depends on the specific facts and circumstances of each case. (v) Recognizing impairment losses of subsidiaries in OCI, can provide a more accurate representation of the group's financial position. This is because OCI is a separate component of equity that reflects items of income and expense that are not recognized in the profit and loss account. By recognizing impairment losses of subsidiaries in OCI, the parent company can provide users of the financial statements with a clearer picture of the group's financial position without distorting its own financial....
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.... best of our information and according to the explanations given to us, the aforesaid consolidated financial statements give the information required by the Companies Act, 2013( the "Act") in the manner so required and give a true and fair view in conformity with Indian Accounting Standards prescribed under section 133 of the Act read with the Companies (Indian Accounting Standards) Rules,2015, as amended ("IndAS") and other accounting principles generally accepted in India, of the consolidated state of affairs of the Group as at March 31, 2020, the consolidated profit, consolidated total comprehensive income, consolidated changes in equity and its consolidated cash flows for the year ended on that date." (g) There is no requirement in the accounting standards that "Intangible Assets Under Development" and "Capital Work-In-Progress" should be transferred to "Intangible Assets" as and when the asset recognition criteria is met (i) BGL has established a consistent process for recording monthly expenses incurred during the development of various products/components. To facilitate operational convenience, the expenses are maintained separately in excel workbooks. At the end of each....
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....nfirmed vide board resolution dated May 10, 2018. (l) The quarterly consolidated financial results were reviewed and recommended by audit committee and approved by the board of BGL (i) The subsidiary financials for the full year, which includes the quarters ended June 30th, 2019, September 30th, 2019, December 31st, 2019, and March 31st, 2020, were fully audited annually by the auditors of the corresponding subsidiaries. (ii) All the quarterly consolidated financial results, which consist of subsidiary financials for the period, for the quarters ended June 30th, 2019, September 30th, 2019, December 31st, 2019, and March 31st, 2020, have been reviewed and recommended by the audit committee and approved by the board of directors of the Company which has been reported in the Stock Exchange. (m) BGL's audit committee was constituted as per regulations and it had appointed independent directors on the board of its overseas material subsidiaries (i) Audit committee was in place and functional prior to October, 2014. The board resolution constituting the audit committee took place in June, 2012. Also, the quarterly consolidated financial results for the quarter ended September 3....
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....ce issue. (ii) Sri. P Murali Mohana Rao and Smt. P Naganandini resigned as designated partners in M/s Palace Heights Avenues LLP on June 27, 2022, and August 10, 2022, respectively. M/s P. Murali & Co., Chartered Accountants, were appointed as statutory auditors of the Company in the annual general meeting held on September 30, 2022. (s) Status of compliance with directions of Interim Order cum SCN (i) Paragraph 177(b) (Audit committee examination of Financial Statement) of the Interim Order cum SCN has been complied with. As regards paragraph 177(b) (financial statement impact of non-compliance) of the Interim Order cum SCN, certified peer reviewed chartered accountant's report is in progress and would be completed very soon. (ii) As regards paragraph 177(c) of the Interim Order cum, BGL has published on the stock exchanges and the same was intimated to SEBI vide its letter dated April 20, 2023. (iii) As regards paragraph 177(d) of the Interim Order cum SCN, BGL has appointed Mrs. Surabhi Sinha and Dr. Jayalakshmi Kanukollu on the board of directors of overseas subsidiary of the Company. (iv) As regards paragraph 177(e) of the Interim Order cum SCN, the Company has dis....
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....(c) BGL has submitted all data and comments timely (i) Brightcom group has 16 subsidiaries and 25 offices spread across the globe. These subsidiaries follow different accounting standards as applicable in those countries, the accounts are maintained in local languages and returns are also filed in local languages. The data requested was for a period of 6 years starting FY 2014-15 till 2019-20. To comply with this, it needed a huge effort to coordinate with the subsidiaries, extract the data, translate the data into English and finally to submit the data according to the format requested. (ii) The resignation of the company secretary in the month of October, 2021 and retirement of the CFO during the month of March, 2022 hampered the data collection and compilation efforts. BGL has submitted the data as and when received. With respect to summons dated October 04, 2022, BGL has submitted all the data and comments on time. (d) Impairment of assets was rightly categorized in OCI (i) By recognizing the impairment losses of the subsidiary in OCI, the parent company can provide users of the financial statements with a clearer picture of the group's financial position. The paren....
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....hould have been taken in the preceding years is without any merits. Further, due to this impairment, there has been no reduction in operating profitability in the two years FY 2018-19 and FY 2019-20. Hence, Noticee 2 submits that the allegation made in the Interim Order cum SCN which states that the impairment made by Brightcom affects the investments, has no basis or relevance at all. (f) BGL is actively working with Daum Corporation to take over Lycos Inc. (i) The original stock purchase agreement was entered between BGL and Daum Holdings Corp. on August 15, 2010 with a downpayment plus earnout payment by end of December 31, 2010. Ybrant Media Acquisition, a BGL group company has paid the advance amount of USD 20 million and got possession of 100% of shares and 44% was pledged back to Daum Holdings Corp against the remaining payment. Daum Corp. later revised the acquisition price that was agreed upon and a case was filed in February 2014. The order for this case was pronounced on October 06, 2015. BGL has gone for an appeal and the final order was issued in May, 2018. BGL is renegotiating the amount payable with Daum Holding Corp. to an amount lower than the one awarded by th....
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.... the Interim Order cum SCN has been passed in April 2023. No case has been made out to show the urgency as to why the interim directions were necessary. (b) Mr. Vijay Kumar Kancharla is not liable under section 27 of SEBI Act (i) Mr. Vijay's role involved leading innovations and he was responsible for BGL's worldwide technology enhancements and innovations. (ii) Mr. Vijay has only violated LODR Regulations and not PFUTP Regulations read with section 12A of SEBI Act as he has neither gained any unfair advantage nor caused any loss to investors. (iii) The Interim Order cum SCN has not brought out any concrete figure of the loss incurred by the Indian investors due to the violations, if any, alleged to be committed by BGL and its directors. (c) Role of Mr. Vijay Kumar Kancharla (i) Vijay is the founder and whole time director of BGL since June 26, 2012. He is responsible for the company's worldwide technology enhancements and innovations. He is stationed in US and day-to-day functions of BGL is handled in India. Therefore, he receives the final financial statements and other records for signatures and necessary compliance. (d) MCA Circular dated March 25, 2011 (i) ....
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....er cum SCN, the minutes of the board meetings of remaining 3 subsidiaries is irrelevant in the current context as the size of their operations is relatively small and there is no impairment in those subsidiaries. 14. Reply of Mr. Y Ramesh Reddy (Noticee 4) submitted vide letter dated July 24, 2023, email dated November 14, 2023, email dated March 15, 2024 and email dated May 27, 2024 is summarized below as follows: (a) Violation of Article 21 and no urgency to pass interim directions (i) By passing the Interim Order cum SCN without going into the merits of the case, SEBI has violated the principles of natural justice, Article 19(1)(g) and Article 21 of the Indian Constitution. (ii) The investigation period is up to March, 2020, however, the Interim Order cum SCN has been passed in April 2023. No case has been made out to show the urgency as to why the interim directions were necessary. (iii) SEBI did not call Noticee 4 (Mr. Yerradoddi Ramesh Reddy) to record his statement. If he would have been called, he would have clarified queries of the Investigating Authority and there would be no need to issue the Interim Order cum SCN. (b) Interim Order cum SCN is vague (i) No s....
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....nt viz the CMD and CFO of the Company, the feedback of the internal audit team that was constituted inside the Company and the statements submitted by statutory auditors of the Company and the audited and unaudited financials of the subsidiaries presented by the management of the Company duly reviewed by the auditor of the Company. (v) As part of the audit committee, Noticee 4 and the other members of audit committee noted that for every quarter: * The due process of stand-alone and consolidated financials were prepared and presented to the audit committee; * The internal audit team provided their inputs as per the scope of their activity and confirmed that proper internal controls were being followed by BGL. * The CMD and CFO certified that the financials of the stand-alone and subsidiaries were audited or reviewed as per the guidelines and regulations stipulated. * The CMD gave a detailed presentation to the committee on the business operations of BGL and each of its major subsidiaries, gave inputs on the financials of these companies. (vi) On the matter of being one of the signatories to the annual report for FY 2015-16, * * the said audited financials and the a....
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....e company is having subsidiaries across the globe and the minor change in any policy could have cascading effect. (ii) The accounting policy followed by BGL is also followed by the peers due to peculiarity of the business. The same is also disclosed in annual report on the regular basis. With regards to allegation made against Noticee 4 that as member of audit committee he has failed to disclose about accounting policies, the accounting policy is mentioned in BGL's annual report for FY 2017-18. (f) Circulars issued by MCA and RBI (i) Reliance is placed upon circulars dated March 25, 2011 and March 02, 2020 issued by Ministry of Corporate Affairs and addressed to all Regional Directors, all Registrar of Companies and all Official Liquidators clarifying that the Registrars of Companies and others should take extra care in examining cases where independent directors are identified as "officer in default". The circular clarifies that civil or criminal proceedings are not unnecessarily initiated against the IDs or the NEDs unless sufficient evidence exists to the contrary. (g) Other submissions of Noticee 4 (i) During his brief tenure in BGL, he took care in fulfilling the res....
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....s neither bought the shares of BGL nor sold the sold the shares. Therefore, he has not benefitted by single paise by any unlawful gains. 15. Reply of Mr. Y. Srinivasa Rao (Noticee 5) submitted vide reply dated October 14, 2023 is summarized below as follows: (a) Violation of principles of natural justice (i) By passing the Interim Order cum SCN without going into the merits of the case, SEBI has violated the principles of natural justice, Article 19(1)(g) and Article 21 of the Indian Constitution. (ii) The investigation period is up to March, 2020, however, the Interim Order cum SCN has been passed in April 2023. No case has been made out to show the urgency as to why the interim directions were necessary. (b) Y. Srinivasa Rao is not liable under section 27 of SEBI Act (i) Y. Srinivasa Rao was looking after the accounting, finance, income tax, GST and other tax related matters relating to Indian operations. (ii) Y. Srinivasa has only violated LODR Regulations and not PFUTP Regulations read with section 12A of SEBI Act as he has neither gained any unfair advantage nor caused any loss to investors. (c) Role of Mr. Y. Srinivasa Rao (Noticee 5) (i) Noticee 5 was neithe....
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....cees 1, 2 and 3 as part of the appeal memorandum filed before Hon'ble SAT dated January 16, 2024. Since the forensic audit report was shared with Noticees 1, 2 and 3 and not Noticees 4 and 5, it was decided to provide the forensic audit report to all the Noticees. Accordingly, the forensic audit report was shared with all the Noticees on February 15, 2024. Thereafter, Noticees were given time until February 21, 2024 to submit additional reply, if any. 17. A summary of date of inspection, date of hearing and date of reply, for all the Noticees, is given in the Table below: Table no. 5 S. No. Noticee Name Date of inspection of documents Date of hearing opportunities Date of replies 1. Brightcom Group Ltd. NA 03/11/2023 07/05/2023, 14/10/2023 10/11/2023, 27/01/2025 2. M. Suresh Kumar Reddy 03/11/2023, 08/04/2024, 26/04/2024. 07/05/2024 16/10/2023, 21/12/2023, 25/05/2024, 27/01/2025 3. Vijay Kancharla 03/11/2023 14/10/2023, 27/01/2025 4. Yerradoddi Ramesh Reddy 03/10/2023 26/09/2023, 08/04/2024, 07/05/2024, 21/05/2024 24/07/2023, 14/11/2023, 14/03/2024, 27/05/2024, 27/01/2025 5. Y. Srinivasa Rao NA 03/11/2023 10/11/2023,....
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.... out to show the urgency as to why the interim directions were necessary. In this regard, certain important dates may be noted: Table no. 6 # Date Event 1. January 20, 2021, January 21, 2021, and May 05, 2021 Complaints forwarded to BSE Ltd. for examination. 2. June 30, 2021 BSE Ltd. submitted its report. 3. September 07, 2021 Investigating authority was appointed. 4. September 16, 2021 Forensic auditor appointed. 5. February 2022 to October 2022 Summons issued to BGL and statements recorded. 6. December 08, 2022 Forensic auditor submitted its report. Thus, from the above, I note that the time taken to pass the Interim Order cum SCN from the end of Investigation Period was justified given the involvement and submission of reports of different third-party stakeholders such as the BSE Ltd. and forensic auditor. 22. Further, the Noticees have submitted that by passing the Interim Order cum SCN without providing an opportunity of personal hearing is in gross violation of natural justice. The interim directions issued against BGL ought to be lifted on an urgent basis. In this regard, I note that paragraphs 5 to 7 and 180 of the Interim Order cum SCN read as follo....
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....te that the Interim Order in the present case was passed under the provisions of sections 11(1), 11(4) and 11B of the SEBI Act. The second proviso to section 11(4) clearly provides that "Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned". In view of the above, I find that the Interim Order cum SCN passed by SEBI was in compliance with the principles of natural justice since, reasons for passing the Interim Order cum SCN have been clearly stated in it and, in accordance with the settled law, the Noticees were afforded a post-decisional opportunity to file their reply and avail opportunities of personal hearing. I, therefore, reject the contention of the Noticees in this regard. 23. The Noticees have also submitted that no case has been made out to show the urgency as to why the interim directions were necessary. Further, the Noticees have relied on the cases of Arshad Warsi (supra), North End Foods Marketing Pvt. Ltd. (supra) and Zenith Infotech Ltd. (supra). In this regard, I note that the Interim Order cum SCN clearly brings out the reasons and circumstances for issuance of....
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....nt" and the language of Clause 50 of the Listing Agreement that "the company will mandatorily comply with the accounting standards issued by ICAI", we do not find any merit in the appellants' submission that SEBI does not have any mandate / jurisdiction on ensuring that accounting standards are followed in compliance with the listing obligations. 18 Similarly, the submission that Clause 50 is not violated because SEBI has no mandate on the accounting standards has no merit. A reading of Clause 50 makes it clear that the stated accounting standards have to be mandatorily followed by a listed entity. Accordingly, we uphold the finding in the impugned order that the appellants have violated Clause 36 and Clause 50, along with the stated accounting standards." (emphasis supplied) 26. The aforesaid judgement of the Hon'ble SAT upheld the jurisdiction of SEBI to initiate action for non-compliance with the applicable accounting standards. Therefore, SEBI is not jurisdictionally barred from examining the compliance with accounting standards by listed companies. 27. Pursuant to issuance of Interim Order cum SCN against the Noticees to this Order, Show Cause Notice was also issued to 7 ....
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....es that led to impairment loss (ii) Impairment loss of investment in subsidiary amounting to INR 411.76 crores in FY 2018-19 (a) Failure to recognize impairment loss (b) Incorrect accounting treatment of impairment loss (c) Failure to disclose events and circumstances that led to impairment loss II. Other Accounting Standards violations (i) Wrong capitalization of R&D expenditure as assets (ii) Incorrect recognition of intangible assets B. Other disclosure violations (i) Not disclosing the initiation of forensic audit to stock exchanges (ii) Inconsistent disclosure of shareholding pattern (iii) Issuing a false and misleading press release on April 10, 2018 with respect to appointment of internal auditor (iv) Did not carry out limited review of unaudited quarterly results for the FY 2019- 2020 (v) Did not ensure that the constitution of its audit committee with effect from October 01, 2014 is in accordance with regulatory requirements (vi) Did not appoint at least one of its independent director on the board of its unlisted material subsidiaries (vii) Did not disclose standalone financial statements of subsidiaries on its website (viii) Did not mainta....
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.... to GDPR in FY 2019-20 33. The Interim Order cum SCN states that BGL had recorded an impairment loss of INR 868.30 crores in its consolidated financial statement for the FY 2019-20 as its subsidiaries were affected by the introduction of General Data Protection Regulation (GDPR). 34. I note that GDPR is a European Union (EU) privacy and security law that governs how personal data related to people in the EU is processed and transferred by organizations. GDPR was adopted in April 2016 and became effective from May 2018. The extract of Article 99 of GDPR which specifies the date of entry into force and application of GDPR is given below. 35. Regarding the effect of GDPR on BGL, vide letter dated October 11, 2022 to SEBI, BGL had explained how its business was affected due to GDPR (answer to questions 25 a & b): "For Digital Marketing Industry, in which BCG operates, personal data forms the core of business. The personal data gathered is used for different purposes like assessing the consumer behavioral patterns, providing relevant advertisements based on customer's age group, income group, gender, geographic location, interests, habits / hobbies, seasonality of purchases and so ....
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....applies to financial assets classified as: (a) subsidiaries, as defined in Ind AS 110, Consolidated Financial Statements; .... 9. An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. 12. In assessing whether there is any indication that an asset may be Impaired, an entity shall consider, as minimum, the following Indications External sources of information (a) there are observable indications that the asset's value has declined during the period significantly more than would be expected as a result of the passage of time or normal use. (b) significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. (c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset's ....
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....al adverse impact of GDPR on its business model were apparent in 2016 itself. If the company was hoping that the announced GDPR would be modified prior to the implementation date of May 2018, the correct approach would have been to recognize and disclose the impairment at the end of the relevant reporting period, and then reverse the impairment loss in accordance with paras 110/ 111 of Ind AS 36 (reproduced later below), if there were a favourable change in regulations later. A hope of a future modification of an already announced regulatory measure cannot be a justification to not recognize its impending deleterious impact. As it transpired, when GDPR came into effect in 2018 as announced in 2016, as the company's statement shows, it had a severe impact on the business, as expected. I find that there is no justification for BGL's failure to carry out annual impairment testing for FYs 2016-17, 2017-18 and 2018-19. I therefore find that BGL has violated Regulation 48 of the LODR Regulations read with paras 4, 9 and 12 of the Ind AS 36. Paras 110 and 111 of the Ind AS 36 are reproduced below for reference: "110. An entity shall assess at the end of each reporting period whether the....
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....rim Order cum SCN further alleges that by not recognizing the impairment loss in profit or loss, BGL overstated its Profit Before Tax (PBT) and Profit After Tax (PAT). Image 2: Consolidated P&L statement of BGL for the year ending on March 31, 2020 Statement of Consolidated Profit and Loss for the year ended 31st March 2020 Particulars Note Year Ending 31/03/2020 Year Ending 31/03/2019 Rupees Rupees REVENUE I. Revenue from operations 27 26,923,183,759 25,802,409,484 II. Other income 141,467,665 (25,135,722) III. Total revenue (I+II) 27,064,651,424 25,777,273,762 IV. EXPENSES Purchase / Cost of Revenue 29 15,112,609,171 14,543,037,135 Employee Benefit expenses 30 1,608,642,294 1,585,137,746 Other Operating Expenses 31 2,313,694,391 2,080,798,977 Financial costs 32 62,980,041 131,769,787 Depreciation and amortization expense 1,795,299,751 1,351,019,468 Total expenses (IV) 20,893,225,648 19,691,763,113 V. Profit/(loss) before tax (III-IV) 6,171,425,776 6,085,510,649 VI. Tax expense Current tax 1,775,577,108 1,640,262,1....
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.... it wanted to upgrade its products to meet GDPR requirements; that the decision to impair assets was taken only after confirming that the assets will not be useful in future. BGL has also submitted that there was an observation period of about one year to evaluate the effectiveness of the changes made which according to it is "the standard protocol for global software system changes". According to BGL, the audit committee of BGL subsequently recommended that all products be tested for impairment at their respective locations, which was conducted in FY 2019-20, and the financials of all subsidiaries made provision for impairment in that year. I find that the there is no such provision of "observation period" specified in the accounting standards. As noted earlier, Ind AS 36 mandates that the impairment loss must be immediately recognized at the end of the reporting period for non-revalued assets. Since the GDPR was announced in April 2016, BGL should have impaired its assets in FY 2016-17 itself, and if the company wished to reverse the impairment loss it could have done so later, in accordance with the provisions of Ind AS. At any rate, even after the pre-announced GDPR formally ca....
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....o INR 868.30 crore included products classified under 'Other current assets' amounting to INR 504.50 crore and under 'Loans and advances' given to service providers / publishers amounting to INR 363.80 crore. In this regard, BGL has submitted that the write-off of loans or advances does not necessarily trigger an impairment of other assets in Company's financial statements. Further, BGL has argued that the criteria for recognizing write-offs of loans and advances are set out in IFRS 9 and Ind AS 109, according to which loans and advances must be assessed for impairment on a periodic basis and a loss to be recognized when the impairment is expected to be 'permanent'. It appears that the Noticees contend that the mandate to impair OCA as per Ind AS 36 is not applicable for 'Loans and Advances', since they are 'financial assets'. This argument is not tenable. As per the explanation provided by BGL to the Forensic Auditor, the impaired 'Loans and advances' were extended by BGL's subsidiaries to vendors for colocation centres and to service providers such as algorithm developers, publishers, brand development in geographies and new market development. Such 'trade advances' for which the....
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....th paras 60 and 61 of the Ind AS 36. (c) BGL failed to disclose events and circumstances that led to impairment loss 48. The Interim Order cum SCN alleges that BGL did not make disclosure in respect of the events and circumstances that led to recognition of impairment loss of INR 868.30 crores in FY 2019-20, contrary to the requirement under Ind AS 36. The Interim Order cum SCN also states that Mr. Suresh Kumar Reddy (Noticee 2), CMD of BGL, before the IA on March 17, 2022, agreed with SEBI's observations that the disclosures required under Para 130 of Ind AS 36 were not made by BGL. An appropriate explanation would have belatedly explained to stakeholders the deleterious impact of the GDPR which had been enacted as early as April 2016. 49. In this regard, paragraph 130 of Ind AS 36 (Impairment of Assets) reads as follows: "130. An entity shall disclose the following for an individual asset (including goodwill) or cash-generating unit, for which an impairment loss has been recognised or reversed during the period: (a) the events and circumstances that led to the recognition or reversal of the impairment loss." 50. In this regard, the Noticees have submitted that assets impa....
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....ls for FY 2018-19 and 2019- 20 from BGL's annual reports are provided below. Image 5: Financials of YMA from BGL's Annual Report 2018-19 Ybrant Media Acquisition Inc USA S. No Description Amount In Amount In INR USD a) Share Capital 1,21,90,40,000 2,70,00,000 b Reserves and Surplus (2,17,41,88,787) (4,08,08,715) c Total Assets 56,38,83,958 81,52,146 d Total Liabilities 56,38,83,958 81,52,146 e Details of Investments NIL NIL f) Turnover - - g Profit before tax - - h) Provision for tax - - i) Profit After Tax - - Other comprehensive income for the period (4,17,64,90,428) 7,40,91,033 Total comprehensive income for the period (4,17,64,90,428) (7,40,91,033) j) Proposed Dividend NIL NIL Image 6: Financials of YMA from BGL's Annual Report 2019-20 Ybrant Media Acquisition Inc USA S. No Description Amount In Amount In INR USD a) Share Capital 1,219,040,000 27,000,000 b) Reserves and Surplus (2,260,078,992) (40,808,715) c) Total Assets 614,590,308 8,152,146 d) Total Liabilities 614,590,308 8,152,146 e) Details of Investments f) Turnover &n....
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.... (c) BGL failed to disclose events and circumstances that led to impairment loss of INR 411.76 crores in FY 2018-19. (a) BGL failed to recognize impairment loss in its standalone financial statement 56. The Interim Order cum SCN stated that the carrying amount of investment in separate financial statements of BGL exceeded the carrying amounts of the investee's, i.e, Ybrant Media Acquisition Inc. ("YMA") net assets in the consolidated financial statements. Therefore, it has been alleged that BGL should have impaired its investment in the subsidiary YMA in the FY 2018-19 in its standalone financial results, which it should have continued to maintain in the financial statements for the FY 2019-20 also, since the net worth of YMA continued to be negative in FY 2019- 20. The allegation is based on the mandate of para 12 of Ind AS 36 dealing with impairment of assets. Paragraph 12 of Ind AS 36 (Impairment of Assets) inter alia reads as follows: "In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: ... Dividend from a subsidiary, joint venture or associate (h) for an investment in a....
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....as one of the criteria for impairment assessment. Obviously therefore in the facts of this case, when the carrying amount of the investment (YMA) in BGL's separate financial statement exceeded the carrying amounts of the investee's (YMA's) net assets in BGL's consolidated financial statements, BGL should have impaired its investment in its standalone financial statements in FYs 2018-19 and FY 2019-20. In fact, while not specifically alleged in the SCN, given that YMA had declared bankruptcy in 2016, impairment should have been suitably recognised in 2016 itself. Be that as it may, as discussed earlier, Ind AS 36 requires impairment loss to be given effect immediately in profit or loss if the asset is not revalued. Since no revaluation had been done, the contentions of the Noticee with respect to ongoing settlement and 'bringing back of the asset' to Brightcom group, are simply not tenable or substantiated. In any case, hopes and prayers for a favourable resolution tomorrow cannot be the basis to avoid adherence to basic accounting standards today. Therefore, I find that BGL violated Regulation 48 of the LODR Regulations read with para 12 of Ind AS 36. (b) BGL recognized impairment....
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.... financial statement, under OCI instead of profit or loss in accordance with Ind AS 36, led to overstatement of its profit in FY 2018-19. (c) BGL failed to disclose events and circumstances that led to impairment loss 64. The Interim Order cum SCN alleged that BGL did not make disclosure in respect of the events and circumstances that led to impairment of INR 411.76 crores in FY 2018-19, contrary to the requirement under Ind AS 36. The Interim Order cum SCN also takes note of the acknowledgment by Noticee 2 of BGL's failure to make disclosures mandated by Para 130 of Ind AS 36. The said para reads as follows: "130. An entity shall disclose the following for an individual asset (including goodwill) or cash- generating unit, for which an impairment loss has been recognised or reversed during the period: (a) the events and circumstances that led to the recognition or reversal of the impairment loss. " 65. Ind AS 36 requires an entity to disclose the events and circumstances that led to recognition of impairment loss when the impairment loss is recognized. In this regard, Noticees have submitted that the loss on investment, which was written off, has been explicitly disclosed on....
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....b) The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor. (c) The listed entity shall refrain from misrepresentation and ensure that the information provided to recognised stock exchange(s) and investors is not misleading. (d) The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors. (e) The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language. (g) The listed entity shall abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by the Board and the recognised stock exchange(s) in this regard and as may be applicable. (h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration ....
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....d development phase (according to BGL), and hence, should have been treated as if they were incurred in the research phase only, and accordingly treated as expenses when they are incurred. (ii) Once the prototype was complete, the product / component then had to move to testing and soft launch stage which would fall into development phase. However, in addition to the expenses related to this development phase, portion of "Other Current Assets" (i.e. expenses incurred during research phase which should have been treated as expenses) relevant to each product / component for which testing and soft launch was completed, also got recognized as "Intangible Assets under Development and Capital Work in Progress". The same was not in accordance with AS 26 and IND AS 38. 68. In this regard, I note that standards relating to internally generated assets are dealt in paragraphs 39 to 54 of AS 26 (Intangible Assets) and paragraphs 51 to 67 of Ind AS 38 (Intangible Assets). Some important definitions and standards from AS 26 are reproduced below: "6.5 Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding....
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....at are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably. 22. An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management's best estimate of the set of economic conditions that will exist over the useful life of the asset. 52. To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into: (a) a research phase, and (b) a development phase. Although the terms 'research' and 'development' are defined, the terms 'research phase' and 'development phase' have a broader meaning for the purpose of this Standard. 53. If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only. Research phase 54. No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the ....
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....e an entity cannot distinguish the research phase from the development phase, the entity is required to treat the expenditure on that project as if it were incurred in research phase and accordingly account for it in its P&L statement (paragraphs 40 and 41 of AS 26 and paragraphs 53 and 54 of Ind AS 38). An intangible asset arising from development phase of an internal project should be recognized only if the enterprise can demonstrate certain criteria such as technical feasibility, intention to complete the asset, ability to use or sell asset, probable future economic benefits, availability of resources to complete the project and ability to measure expenditure attributable to the intangible asset (see paragraph 44 of AS 26 and paragraph 57 of Ind AS 38). 71. I note from the audited consolidated financial statements of BGL for the year ending March 31, 2020 that heads such as "Other Current Assets", "Other Intangible Assets" and "Intangible Assets under Development" were recorded in its balance sheet. The policy of BGL as submitted to SEBI during investigation is reproduced below: "Other Current Assets: All the expenses incurred towards Salaries, Software, Tools and Hardware du....
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....ted for in the P&L statement. Therefore, I do not find any merit in this contention. 74. The Noticees have stated that BGL has subsidiaries in various countries and the capitalization of expenses was done as per applicable local law. They have argued that BGL only presents the consolidated financial statements of its subsidiaries without changing the accounting standards as applicable in each local subsidiary. In this regard, I note that Para B87 of Accounting Standard 'Ind AS110 -Consolidated Financial Statements' and Para 20 & 21 of 'Accounting Standard (AS) 21 Consolidated Financial Statements' require an Indian parent company having overseas subsidiaries to ensure that the books of accounts of such subsidiaries are maintained in such manner that would assist the management in the preparation of consolidated financial statements as per Indian GAAP/ Ind AS. This mandate is to be complied with irrespective of the statutory requirement with respect to the maintenance of books of account and audit of the standalone financial statements in the jurisdiction of their incorporation. Therefore, I find the aforementioned submission of the Noticees to be untenable. 75. Further, though No....
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....heet, thereby reducing its current- period expenses and artificially inflating its profit. Accordingly, I find that the accounting policy followed by BGL that led to wrong capitalization of R&D costs as assets is in violation of AS 26 (for FYs 2014-15 and 2015-16) and Ind AS 38 (for FYs 2016-17 to 2019-20). Therefore, I find that BGL has violated Clause 50/ Regulation 48 read with AS 26 and Ind AS 38. (ii) Incorrect recognition of intangible assets 79. The Interim Order cum SCN alleges that asset recognition practice at BGL was not in accordance with AS 26 (Intangible Assets) and Ind AS 38 (Intangible Assets) as each year, the additions to the "Intangible Assets under Development" and "Capital Work-in Progress" were entirely transferred to "Intangible Assets" in the subsequent year. Further it alleges that the aforesaid was not the correct practice as it was unlikely that entire expenditure on concept stage was incurred on the very last day of the financial year which required BGL to transfer entire opening balance in "Capital Work-in Progress" or "Intangible Assets under Development" to "Intangible Assets" at the end of subsequent financial year. The same is shown in the tables ....
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.... in FY 2016-17, the additions in "Intangibles under Development" was INR 71 crore, the same amount was the closing balance in the said year. (ii) The opening balance each year became the sale/deletion each year. For example, in FY 2016-17, the opening balance of "Intangible Assets under Development" was INR 102 crore, the same amount was the amount of sale/deletion in the said year. (iii) The addition each year under "Intangibles under Development" and "Capital Work- in-Progress" was transferred to "Intangible Assets" in the subsequent year. For example, in FY 2015-16, the additions to "Intangibles under Development" and "Capital Work in Progress" were INR 102 crore and INR 70 crore respectively and this was reflected in FY 2016-2017 "Intangible Assets" as addition of INR 172 crore. (This pattern is seen across all financial years except in the case of FY 2014-15) 83. From the above, it can be seen that the additions to Intangibles under Development and Capital Work-in-Progress each year were transferred to Intangible Assets in the subsequent year. BGL in its reply before me has submitted that there is no requirement in the accounting standards or SEBI regulations that entries....
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....d at above, I find that BGL - (a) Wrongly capitalized R&D expenditure as assets in contravention of AS 26 (for FY 2014-15 and 2015-16) and Ind AS 38 (for FYs 2016-17 to 2019-20); and, (b) Incorrectly recognized intangible assets in contravention of AS 26 (for FY 2014-15 and 2015-16) and Ind AS 38 (for FYs 2016-17 to 2019-20), in violation of clauses 49 (I)(C)(1)(a) and 50 of the erstwhile Listing Agreement (reproduced below) for FY 2014-15 and regulation 4(1)(a), (b), (c), (d) (e), (g), (h), (i), (j), 4(2)(e)(i), 33(1)(c) and 48 of LODR Regulations (reproduced earlier) for FYs 2015-16 to 2019 Listing Agreement "49. CORPORATE GOVERNANCE I. The company agrees to comply with the provisions of Clause 49 which shall be implemented in a manner so as to achieve the objectives of the principles as mentioned below. In case of any ambiguity, the said provisions shall be interpreted and applied in alignment with the principles. C. Disclosure and transparency 1. The company should ensure timely and accurate disclosure on all material matters including the financial situation, performance, ownership, and governance of the company. a. Information should be prepared and disclose....
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....." 88. The Interim Order cum SCN alleges that SEBI vide its letter dated September 16, 2021, had appointed a forensic auditor in the matter of BGL, which was a material development in terms of regulation 30(1),(2),(6) read with clause 17 of A of Part A of Schedule III of the LODR Regulations. The fact of initiation of forensic audit ought to have been disseminated to the stock exchanges within 24 hours, however, BGL did not make the said disclosure within the specified time. 89. In this regard, BGL has submitted that after it received the forensic audit initiation letter from SEBI on September 16, 2021, it requested SEBI to withdraw the forensic audit. On February 25, 2022, SEBI informed BGL that its request for withdrawal of forensic audit has not been acceded to and, therefore, according to BGL, it took immediate steps to comply with the directions made by SEBI in the letter dated September 16, 2021. 90. I note that BGL was required to make disclosure to the stock exchanges regarding initiation of forensic audit within 24 hours from receipt of information by SEBI. BGL received information from SEBI regarding the initiation of forensic audit on September 16, 2021. Yet, it discl....
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....ovided to recognised stock exchange(s) and investors is not misleading. (h) The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders. CHAPTER IV OBLIGATIONS OF LISTED ENTITY WHICH HAS LISTED ITS SPECIFIED SECURITIES Holding of specified securities and shareholding pattern. 31. (1) The listed entity shall submit to the stock exchange(s) a statement showing holding of securities and shareholding pattern separately for each class of securities, in the format specified by the Board from time to time within the following timelines - (b) on a quarterly basis, within twenty one days from the end of each quarter; and, 92. The Interim Order cum SCN alleges that there were differences between the shareholding patterns filed by the Company with the stock exchange and the shareholding pattern available with the RTA. The shareholding data of depositories was consistent with RTA data. These inconsistencies are detailed in the Table below: Table no. 10 Details of Promoter Shareholding Quarter Ending Reported to Stock Exchanges (A) As Per RTA Data (B) Difference (A-B) No. of S....
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....04 22.40 4,29,24,541 4.12 19,03,60,063 18.28 31-Mar-22 22,36,81,791 18.47 4,24,31,791 3.51 18,12,50,000 14.96 30-Jun-22 37,27,82,652 18.47 7,06,99,321 3.51 30,20,83,331 14.96 *-PUC - Paid-Up Capital The above table indicates that the promoters were holding less than what had been disclosed and consequently, public is holding more than that has been disclosed on the stock exchange. 93. In relation to the above, BGL has submitted before me that it had made appropriate disclosures to the stock exchange regarding the shares pledged (i.e. encumbrances) which is verifiable. According to BGL, as per the terms of the pledge agreement, the shares would be transferred to the account of the pledgee (lender). However, according to BGL, the beneficial ownership and voting rights of the shares would be with the promoters (pledgers) of BGL. 94. As already recorded in the SCN, information was sought from the depository vide email dated March 23, 2022 regarding encumbrances marked against the shares held by promoters of BGL. In response, the depositories submitted that except for 4 demat accounts, none of the demat accounts had any encumbrance. Further....
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....was not appointed as the internal auditor. 98. In this regard, I note that the April 10, 2018 BGL press release, reads as follows: "LYCOS (NSE & BSE: "LYCOS" or the "company"), the global Internet brand, today announced the appointment of Ernst & Young as its Internal Auditor. E&Y will help the company achieve trusted corporate governance and reporting. LYCOS is one of the original and most widely known Internet brands in the world, evolving from pioneering search on the web, into a family of three business units covering digital media, marketing, and Internet of Things (IoT). Ernst & Young will help us with a holistic view to improve the effectiveness of risk management, control, and governance." said Suresh Reddy, Chairman & CEO of Lycos Internet Limited." 99. Vide summons dated May 24, 2022, SEBI asked BGL to confirm whether it had carried out its internal audit for the period April 01, 2014 to March 31, 2020. BGL vide letter dated June 23, 2022 replied that "We did not appoint external firm to do the internal audit; rather, as permitted under Rule 13 of the Companies (Account) Rules, 2014, an internal audit team was constituted from amongst our employees in the accounts....
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....dited financial statements/ results of those entities whose financial statements/ results are consolidated with that of the listed entity's. 104. The Interim Order cum SCN alleges that BGL did not carry out limited review of unaudited results for the quarters of FY 2019-2020. In this context, the quarterly consolidated results for the FY 2019-2020 reviewed by the statutory auditors and the details of results not subjected to audit/review as identified during investigation are reproduced below: Table no. 11 All Figures in INR Crores I. Quarterly Results Reported by BGL Particulars Reference Jun-19 Sep-19 Dec-19 Mar-20 Type of Audit Limited Review Audit Consolidated Revenue A 574.98 629.57 859.52 628.25 Consolidated Profit After Tax B 83.16 105.47 143.84 107.65 Consolidated Assets C 3,465.54 3,712.96 3,755.96 3,270.00 II. Details obtained from Auditor's report No of Subsidiaries not reviewed/audited D 14 14 16 14 Revenue of Subsidiaries not reviewed/audited E 459.92 513.02 747.34 Not Specified PAT of Subsidiaries not reviewed/audited F 107.82 106.22 126.33 Not Specified Assets of Subsidiaries not reviewed/....
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....s per June, 2019 unaudited quarterly financial results was INR 574.98 crores, out of which revenue of subsidiaries not reviewed/audited amounted to INR 459.92 crores i.e, nearly 80% of revenue of BGL was not reviewed / audited for June, 2019. 107. The limited review report dated November 14, 2019 provided by PCN & Associates in respect of BGL available on the BSE Ltd. website titled "532368 | Un-Audited Financial Results For The Quarter And Half Year Ended September 30, 2019", inter alia states that: "5. The accompanying Statement includes interim financial results and other financial information of 14 Subsidiaries which reflects total assets of INR 3,524.70 crores as at September 30, 2019, total revenues of INR 513.02 crores and 972.94 crores total Profit after tax of INR 106.22 crores and 214.04 crores total comprehensive income of INR 183.73 crores and 284.95 crores. for the quarter ended September 30, 2019 and for the period from April 01, 2019 to September 30, 2019, respectively and net cash outflow of INR5.08 crores for the period from April 01, 2019 to September 30, 2019, and these interim financial results and other financial information has been reviewed by parent compa....
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....evenue of subsidiaries not reviewed/audited amounted to INR 747.34 crores i.e, nearly 87% of revenue of BGL was not reviewed / audited for December, 2019. 109. As per "532368 | Audited Financial Results For The Quarter And Year Ended March 31, 2020 And Recommendation Of A Final Dividend" published on the website of BSE Ltd. on June 25, 2020, the Independent Auditor's report reads as: "The consolidated Financial Results includes 14 subsidiaries financial statements which are not audited by us, whose interim Financial Statements reflect Group's share of total assets of INR3058.99 crores before the eliminations as at 31st March 2020, Group's share of total revenue of Rs, 2224.86 crores before the eliminations and Group's share of total net profit after tax of INR441.52 crores for the quarter ended 31st March 2020 and for the period from 01-04-2019 to 31-03-2020, as considered in the consolidated Financial Results. ...." From the above, I note that the financial information of 14 subsidiaries of BGL was not subject to audit. The total consolidated assets of BGL as on March, 2020 was INR 3,270 crores, out of which assets of subsidiaries not reviewed/audited amounted to INR3,058.99 c....
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....any with effect from 27th December, 2016 and in respect of whom the Company has received a notice in writing from a Member proposing his candidature for the office of Independent Director, be and is hereby appointed as an Independent Director of the Company, not liable to retire by rotation and Mr. Raghunath Allamsetty shall hold office for a term upto five consecutive years commencing from 27th December, 2016." (emphasis supplied) 114. The Company also made a disclosure under regulation 30 of LODR Regulations on December 27, 2021, stating "... this is to inform that Mr.Allam Raghuanth (DIN: 00060018) an Independent Director of the Company has completed the second term of office on December 26, 2021 thereby completing two terms as an Independent Director and consequently he also ceased to be a Director of the Company with effect from close of business hours of December 26, 2021." (emphasis supplied) 115. From the above notice to AGM and disclosure under regulation 30 of LODR Regulations, it is clear that Mr. Raghunath Allamsetty was appointed by the board meeting on December 27, 2016 for his second term. As seen above, the shareholder approval for his appointment for second ter....
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....onsent prior to his re-appointment for a second term, in considered view, is a pre-requisite for the independent director to be eligible to serve on the Board of the company for a second term. * If the shareholders' approval by special resolution for his re-appointment for second term is not taken as on the last date of the first term, then such independent director cannot be re-appointed by Board as an additional director for second term, as he does not possess the eligibility to get re-appointed for second term and hence, he ceases to be a director at the end of his first term. (emphasis supplied) 117. Thus, there was a requirement to obtain shareholders' approval by special resolution under section 149(10) and (11) of Companies Act, 2013, before the last date of the first term of Mr. Raghunath Allamsetty ended on September 29, 2015. Therefore, it was alleged that between December 27, 2016 and September 27, 2017 (i.e, from the time Mr. Raghunath Allamsetty was appointed by the board of BGL to the time his appointment was approved by the shareholders in AGM), the appointment of Mr. Raghunath Allamsetty, as an additional director for the second term was not in accordance with t....
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....ependent director" means a non-executive director, other than a nominee director of the listed entity: (vi) who, neither himself, nor whose relative(s) - (A) holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed: 122. The definition of "relative" under the Listing Agreement and LODR Regulations is as under: Listing Agreement "Relative" shall mean "relative" as defined in section 2(77) of the Companies Act, 2013 and rules prescribed there under LODR Regulations 2(1)(zd) "relative" means relative as defined under sub-section (77) of section 2 of the Companies Act, 2013 and rules prescribed there under: 123. The definition of "relative" under the Companies Act, 2013 is as follows: 2(77) "relative'', with reference to any person, means any one who is related to another, if- (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed The phrase....
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....low the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors. Explanation.- For the purpose of this clause, the expression "related to any promoter" shall have the following meaning: (i) if the promoter is a listed entity, its directors other than the independent directors, its employees or its nominees shall be deemed to be related to it; (ii) if the promoter is an unlisted entity, its directors, its employees or its nominees shall be deemed to be related to it Audit Committee. 18. (1) Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following: (b) two-thirds of the members of audit committee shall be independent directors and in case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors." 126. If Mr. Raghunath Allamsetty is considered as a Non-Executive and Non Independent Director of BGL, the board composition and audit committee composition of BGL would be as follows: Table no. 14 Regulation 17(1) of LODR Regulations (requirement: ....
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....et worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.] ^ Substituted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1.4.2019. Prior to the substitution, sub-regulation (1) read as follows: "(1) At least one independent director on the board of directors of the listed entity shall be a director on the board of directors of an unlisted material subsidiary, incorporated in India." 129. As can be seen from the amended provision and the existing legal provisions, reproduced above, prior to April 01, 2019, at least one independent director of a listed company had to be on the board of its unlisted material subsidiary, provided it was incorporated in India. After April 01, 2019, this mandate applied irrespective of whether the subsidiary was incorporated in India or not. The Interim Order cum SCN alleges that BGL did not comply with the aforesaid mandate. In this regard, I note that vide email dated August 02, 2022, BGL had furnished list of material subsidiaries for each of the FYs during the Investigation Period which is given below: Table no. 15 Material Subsidiaries Sl. ....
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....iary of the listed entity in respect of a relevant financial year, uploaded at least 21 days prior to the date of the annual general meeting which has been called to inter alia consider accounts of that financial year]*#* *# Substituted for the words "on its website" by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. 1.4.2019. *#* Inserted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, w.e.f. the date specified (As per SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018, the said regulations shall come into force with effect from April 01, 2019). 133. The Interim Order cum SCN alleges that BGL did not publish standalone financial statements of its subsidiaries on its website. Further, it alleges that despite various summons sent to BGL, it did not provide the link where the separate audited accounts in respect of each of its subsidiaries were uploaded. 134. In this regard, I note that in the statement recording of Mr. Suresh Kumar Reddy, Chairman and Managing Director of BGL, on March 17, 2022, he was asked : "Why the company has not disseminated the....
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....mping and audit trails to ensure non-tampering of the database." 139. The Interim Order cum SCN alleges that BGL did not maintain a structured digital database ("SDD") as required under the PIT Regulations. 140. In this regard, I note that during the course of investigation on May 31, 2022, M. Suresh Kumar Reddy, Chairman and Managing Director of the Company, was asked to furnish the copy of the SDD maintained by the Company in accordance with regulation 3(5) of the PIT Regulations. In response, Mr. M. Suresh Kumar Reddy, vide email dated June 07, 2022, merely furnished an excel sheet containing a list of insiders. On further inquiry by SEBI, Mr. Suresh Kumar Reddy stated the following: "We would like to submit that in order to create and maintain the Structured Digital Database, a separate software is needed and the Registrar and Transfer Agent of the Company who maintains the details of shareholding including the BENPOS files is required to input data into the software. Due to certain unavoidable circumstances, the software for this purpose could not be procured and the server could not be installed at our Registered Office. We were also not able to identify third party provi....
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....h, in the opinion of the board of directors of the listed company, is material. (3) The listed entity shall make disclosure of events specified in Para B of Part A of Schedule III, based on application of the guidelines for materiality, as specified in sub-regulation (4). (4) (i) The listed entity shall consider the following criteria for determination of materiality of events/ information: (a) the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or (b) the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date; (ii) The listed entity shall frame a policy for determination of materiality, based on criteria specified in this sub- regulation, duly approved by its board of directors, which shall be disclosed on its website. (6) The listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or information as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information: Provided that in case the di....
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....y about the timing of recoverability of assets, the same is to be impaired. As a prudent accounting practice, the management had taken decision to impair the advances". The Company further stated that: "The primary reason for impairment, especially on the OCA (Other current Assets) and current assets were due to the introduction of new cyber law in 2018 across the EU and various parts of the world called the GDPR". As per BGL's board minutes dated June 25, 2020, GDPR was the primary reason for impairment of 'Other Current Assets' and 'Current Assets' in FY 2019-20. 144. As noted earlier, GDPR was enacted by European Parliament in April, 2016 and became applicable with effect from May 25, 2018. By its own subsequent disclosure, BGL admitted that GDPR was a regulatory change that had a material adverse impact on its operations. Thus, the conditions necessitating disclosure as laid out in regulation 30(4) read with schedule III of LODR Regulations and regulation 34 read with schedule V of LODR Regulations were satisfied, and a timely disclosure was required but not made. Further, as per regulation 34(2) read with Schedule V of the LODR Regulations, BGL was required to disclose the ....
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.... it does not make any specific disclosure in respect of impact of GDPR on the business of the Company in the FY 2018-19. The article published in The Hindu dated June 19, 2018 reads as follows: "The General Data Protection Regulation (GDPR), enforced by the European Union last month, has cleared the ambiguity on privacy, and would benefit consumers and firms worldwide, said Brightcom Chairman and CEO Suresh Reddy. Besides being a threat to Google, Facebook and Whatsapp, the data privacy law had prompted staff training, change of codes, alteration of information flow and purchase of newer equipments across IT firms, he said, speaking to The Hindu over the phone. "The ambiguity over the usage of information and privacy has gone. We are compliant with the new law and are helping non-compliant clients to suit the new requirements," Mr. Reddy said. Saying that stricter privacy laws were expected to hit the market, he added, "The US, Australia and Singapore are watching the GDPR implementation. It is expected to be a template for them to develop their own versions." 147. I note that the above article also does not delve into the impact of GDPR on the functioning of BGL. As held in par....
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.... or Concerns in the MDAR in the Annual Reports for the FYs ending March 31, 2017 to March 31, 2020. (3) : If the answer to Issue I. to II. above is in affirmative, whether Noticees 2 to 5 are responsible for the violations of BGL? 151. The allegations made against Noticees 2 to 5 can be categorised into the following two types: (a) Direct liability for the violations committed by them; and, (b) Vicarious liability for the violations committed by the company. 152. The designation held by the Noticees in BGL and their respective tenures as per the Interim Order cum SCN are as under: Table no. 17 Noticee no. Name of the Director Designation From To 2 Mr. M. Suresh Kumar Reddy Chairman and Managing Director (CMD) & Promoter 26/06/2012 27/08/2023# 3 Mr. Vijay Kancharla Whole-Time Director (Promoter) 26/06/2012 02/01/2024 4 Mr. Yerradoddi Ramesh Reddy* Independent Director 26/06/2012 09/05/2016 Executive Director 09/05/2016 20/04/2017 Group CFO 09/05/2016 08/05/2021 5 Mr. Y. Srinivasa Rao Chief Financial Officer 01/01/2015 25/03/2022 * Mr. Y. Ramesh Reddy, Executive Director (Finance) has stepped down from the board of director of the Company wit....
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....Mr. A. Raghunath 4 3 4 $Mr. Subrato Saha* Not Applicable 2 1 5 1 2 0 Not Applicable Not Applicable 5 Mr. Vijay Kancharla* Not Applicable 2 2 5 2 4 1 4 1 4 0 6 Dr. K. Jayalakshmi Kumari*** Dr. K. Jayalakshmi Kumari*** Not Applicable Not Applicable 5 5 4 4 4 4 4 4 E^ = Eligible to Attend A^^ = Attended * Appointed as members w.e.f. September 29, 2015. **ceased to be the members w.e.f. September 29, 2015 ***Appointed as member w.e.f. May 17, 2016 #Appointed as member w.e.f. December 27, 2016 & as Chairman w.e.f. February 14, 2017 $ Mr. Subrato Saha ceased to be a member w.e.f. October 25, 2017. $$Y Ramesh Reddy was the chairman of the Audit Committee till May 09, 2016. 155. The board of directors of BGL who are the signatories to the financial statements and signatories to CEO / CFO certification as required under clause 49 of the Listing Agreement (for FY 2014-15) and regulation 17(8) of LODR Regulations (For FY 2016-17 to FY 2019- 20) are given below: Table no. 20 Signatory Details 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Name De....
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....s 49 (I)(C)(1)(a) and 50 of the erstwhile Listing Agreement (for the FY 2014-15). Further, by being a signatory to the CEO / CFO certification, he has violated Clause 49(IX) of the erstwhile Listing Agreement (For the FY 2014-15) & regulation 17(8) of LODR Regulations (for the FYs 2015-16 to FY 2019-20). The said provisions are reproduced below: Listing Agreement 49. CORPORATE GOVERNANCE I. The company agrees to comply with the provisions of Clause 49 which shall be implemented in a manner so as to achieve the objectives of the principles as mentioned below. In case of any ambiguity, the said provisions shall be interpreted and applied in alignment with the principles. D. Responsibilities of the Board 1. Disclosure of Information b. The Board and top management should conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture for good decision-making. 2. Key functions of the Board The board should fulfill certain key functions, including: b. Monitoring the effectiveness of the company's governance practices and making changes as needed.....
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....following responsibilities: (i) Disclosure of information: (2) The board of directors and senior management shall conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture of good decision-making. (ii) Key functions of the board of directors- (2) Monitoring the effectiveness of the listed entity's governance practices and making changes as needed. (7) Ensuring the integrity of the listed entity's accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards. (8) Overseeing the process of disclosure and communications. (iii) Other responsibilities: (1) The board of directors shall provide strategic guidance to the listed entity, ensure effective monitoring of the management and shall be accountable to the listed entity and the shareholders. (2) The board of directors shall set a corporate culture and the values by which executives throughout....
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....r does not suffice for imputing vicarious liability to such person. The said finding of Hon'ble SAT has to be read in terms of the overall context of the case. The said finding was made in light of the fact that two senior executives of the company were vested with relevant powers and functions in relation to the subject transaction. Further, Hon'ble SAT had noted "....Thus, we are of the opinion, that in view of the stark evidence in the form of minutes of the two Board meetings of RIL which conclusively proves that the impugned trades were carried out by two senior officials without the knowledge of the appellant no liability can be fastened upon noticee no. 2 in the facts of the given case....". The direct involvement of Noticee 2 in the facts of this case render the Reliance Industries Ltd. (supra) case irrelevant. Therefore, the ratio of Reliance Industries Ltd. (supra) does not apply to the present case. (c) In the present case, Noticee 2 being the Promoter, Chairman and Managing Director of BGL during the Investigation Period and having attended the relevant meetings where decisions were taken and having signed the CEO/CFO certification & financial statements for FYs 2014-....
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....und. In the Action Financial Services Ltd., the benefit of doubt was given to noticees who were additional director and independent directors of the company. However, in the present case Mr. Vijay Kancharla is a Promoter and he was a Whole Time Director of BGL. (d) I find it appropriate to place reliance on the case of N. Narayanan vs. The Adjudicating Officer, SEBI, Civil Appeal Nos. 4112-4113 of 2013 (D. No. 201 of 2013), decision dated April 26, 2013, wherein a Whole Time Director had made a similar contention that he was dealing with a particular department and he had relied on the auditor's statements in financial matters, therefore, he should not be held personally liable. The Hon'ble SC held: "40. The Appellant has taken the stand, as already stated, that even though he was a whole time Director he was not conversant with the accounts and finance and was only dealing with the human resource management of the company, hence, he had no fraudulent intention to deceive the investors. We find it difficult to accept the contention. The Appellant, admittedly, was a whole time Director of the company, as regards the preparation of the annual accounts, the balance-sheet and finan....
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....find that he has violated regulation 18(3) read with Part C of Schedule II of the LODR Regulations. (g) Therefore, I find that Vijay Kancharla (Noticee 3) failed to discharge his duties as a director during FYs 2014-15 to 2019-20. Accordingly, he is directly liable for the violation of clauses 49(I)(D)(1)(b) and (2)(b)(h) of the erstwhile Listing Agreement (for the FY 2014-15) and regulations 4(2)(f)(i)(2), 4(2)(f)(ii)(2)(7)(8), 4(2)(f)(iii)(1),(2),(3),(6),(7),(12) of LODR Regulations (For the FYs 2015-16 to FY 2019-20) and vicariously liable for the violation of clauses 49 (I)(C)(1)(a) and 50 of the erstwhile Listing Agreement (for the FY 2014-15). 158. Role of Noticees 2 and 3 in non-maintenance of Structured Digital Database (SDD) (a) I note that the Interim Order cum SCN alleges that Mr. M Suresh Kumar Reddy and Mr. Vijay Kancharla failed to ensure the implementation and maintenance of SDD containing the names of such persons or entities with whom UPSI was shared, as required w.e.f April 01, 2019, thereby violating regulation 3(5) of PIT Regulations. The said provision as it existed at the relevant time reads as follows: "The board of directors shall ensure that a structu....
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....amesh Reddy has also submitted documents in support of his claim that he was employed with "Edvenswa Tech Pvt. Ltd." during FY 2019-20 and with "Aetas Infra Solutions Private Limited" during FY 2017-18. Although the evidence on record shows that Mr. Y Ramesh Reddy has resigned from the post of Executive Director, there is no proof to show that he had resigned from the post of Group CFO as well. The Annual Reports of BGL for FYs 2018-19 and 2019-20 do not carry the name of Mr. Y Ramesh Reddy in the list of KMPs/ any other capacity. I also note that the BSE website, under corporate information of BGL, lists Mr. Y Ramesh Reddy as the Group CFO even as on date. In this regard, I note that Interim Order cum SCN alleges that he was the Group CFO only till May 08, 2021. Therefore, this information on the BSE website does not appear to have been updated and cannot be relied upon. That being the case, the allegation in the SCN that he continued to be associated with BGL till May 08, 2021 is not entirely substantiated. Considering the aforesaid, in the absence of cogent evidence, I find it appropriate to only consider his tenure in BGL from May 09, 2016 till April 20, 2017 during which he fu....
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.... internal control systems; 13. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit; 14. Discussion with internal auditors of any significant findings and follow up there on; 15. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board; 16. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern; 20.Carrying out any other function as is mentioned in the terms of reference of the Audit Committee. Explanation (i): The term "related party transactions" shall have the same meaning as provided in Clause 49(VII) of the Listing Agreement" (g) Further, he had attended 19 out of 20 board meetings of BGL held between FYs 2014-2015 to FY 2016-2017. He had also signed financial statements for the FY 2015-2016. H....
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....of his roles involved day to day management and maintenance of finance and accounts of BGL or its subsidiaries or management and monitoring of operations of any division or subsidiary of BGL or any financial control or management. In this regard, I note that as an Independent Director and Audit Committee Member and later as Executive Director and Group CFO, it was his responsibility to ensure that the financial statements give a true and fair view of the Company's affairs. The violations observed in this Order are not minor, and they completely overhaul the picture of financial statements projected by the Company. (l) Mr. Y. Ramesh Reddy has contended that no specific role has been attributed to him to enable him give a suitable reply to the Interim Order cum SCN. Without specifying specific role in the wrongdoing, if any, harsh directions have been issued against him. According to him, the SCN is the first limb of the quasi-judicial process and the findings/ allegations in the same ought to be spelt out specifically and not vaguely. He has placed reliance on the case of: Canara Bank v/s. Debasis Das, (2003) 4 SCC 557. He has also relied on the MCA Circular dated March 25, 2011, ....
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....he stand of the learned counsel for the appellants. The whole time director attending to the affairs of the company on a full time basis and the directors being members of the audit committee could not have ignored the "red flag" while considering the accounts of the company." (m) As already discussed earlier, the cases of Sayanti Sen, Amazan Capital and Action Financial Services do not apply to the facts of this case even in the context of Noticee no. 4. Noticee no. 4, for a considerable period, was an executive director and not merely an independent director. His participation in several board meetings and audit meetings and his affirmation of the financial statements for FY 2015-16 have all been recorded above. For these reasons, the case laws cited by him do not come to his aid. (n) In view of the above facts and circumstances, I find that Noticee 4 has violated the following provisions of law: (i) For failure to perform duties as a director: Regulations 4(2)(f)(i)(2), 4(2)(f)(ii)(2)(7)(8), 4(2)(f)(iii)(1)(2)(3)(6)(7)(12) of LODR Regulations (reproduced above). (ii) For failure to perform duties as member of audit committee: Clause 49 III D of erstwhile Listing Agreemen....
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....ses and conjectures. I do not find merit in this argument. Financial frauds and inadequate material disclosures may create huge investor losses by keeping them in the dark around the true state of affairs of the company. Further, computation of loss caused is not a necessary requirement to determine whether the act or omission amounted to a fraud or manipulative device. 162. Noticees 2 to 5 have argued that they have only violated the provisions of LODR Regulations and not PFUTP Regulations as they have neither gained any unfair advantage nor caused any loss to the investors. In this regard, in Issue (4), I have explained in detail how the activities of BGL constituted fraud. Therefore, this contention is without merit. Considering the same, the cases of Dalmia Industrial Development Limited (supra) and GV Films (supra) does not further the contentions raised by Noticees 2 to 5. 163. Noticee 2 to 5 have relied upon the case of Brij Lal Mittal & Ors. (supra) to submit that simply because a person is a director of the company, it does not necessarily mean that he fulfils both the requirements of being in "charge of" and "responsible to" the company for the conduct of its business. ....
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....e case, whereas this Order brings out the role of Noticees 2 to 5 in terms of their attendance in board meetings, signature on financial statements etc, to demonstrate their knowledge or complicity in the violations discussed in this Order. The aforesaid case was a criminal case regarding food adulteration offence, whereas the present case is in the nature of civil proceeding where the standard of proof if "preponderance of probability" and not "beyond a reasonable doubt". In the case of Pritha Bag (supra), the appellant therein was an additional director whereas in the present case none of the Noticees were Additional Directors of BGL, rather they occupied crucial positions such as Promoter, Whole Time Director, Independent Director, Member of Audit Committee and CFO. During the tenure of the appellant in the aforesaid case, she had also not attended any board meeting, received any sitting fees or benefited from any quarter, which is not the case with Noticees 2 to 5. Thus, the aforesaid case does not apply. In the case of Brooks Laboratories Ltd. (supra), the noticee therein was an Additional Director who neither took part in day to day activities nor attended any board meeting n....
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....y whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market.] 2) Dealing in securities shall be deemed to be a ** [manipulative] fraudulent or an unfair trade practice if it involves ***[any of the following]:- (f) *[knowingly] publishing or causing to publish or reporting or causing to report by a person dealing in securities any information *[relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals,] which is not true or which he does not believe to be true prior to or in the course of dealing in securities; #[(k) disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities....
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....nce to accounting standards ensures that the listed company ensures consistency, transparency and enhance accountability thereby inter alia reducing the risk of fraud. Financial statements that do not comply with the strict letter and spirit of the Accounting Standards, fall foul of the mandate under LODR Regulations with respect to disclosures of financials of the company. 168. Regulation 3(c) of PFUTP Regulations states that no person shall directly or indirectly employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed on a recognized stock exchange. Regulation 3(d) of PFUTP Regulations states that no person shall directly / indirectly engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed on a recognized stock exchange in contravention of the provisions of the SEBI Act or the rules and the regulations made there under. Regulation 4(1) of the PFUTP Regulations inter alia seeks to prohibit any scheme to manipulate the books of accounts or financial statements of a company that would dire....
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....ting investors to remain invested. 170. Noticees have also contended that Interim Order cum SCN has failed to bring out findings regarding any "inducement" which is required to constitute "fraud" under PFUTP Regulations as held in SEBI vs. Kanaiyalal Baldevbhai Patel and Ors. (2017) 15 SCC 753. Noticees have also relied upon the case of R.K Global (supra) to submit that higher degree of probability must exist before fraudulent charge is established. Further, reliance has been placed on the case of Ram Sharan Yadav (supra) to submit that a charge of corrupt practice has to be proved by convincing evidence and not merely by preponderance of probabilities. I find that the case of Ram Sharan Yadav (supra) is not applicable, as it relates to standard of proof in a corruption case before the Court, whereas the current case is a quasi-judicial proceeding of civil nature. 171. I note that to prove a violation of Section 12A of the SEBI Act, or Regulation 3(b), (c) and (d) of PFUTP Regulations, the test is to determine whether the device or scheme would operate as a fraud or deceit on investors dealing in such securities. The misrepresented financial statements and other inadequate/ false....
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....l or purchase securities would also come within the ambit of unfair trade practice in securities. 174. Fraudulent schemes of this nature in securities markets cannot be perpetrated by one or two persons alone. There are likely to be several persons who may be involved in various aspects of fraud, the activities of whom when individually seen in isolation may appear genuine or mundane. Fraudulent schemes of this nature in securities markets usually involve co-ordinated activity by several connected persons individually playing separate parts. By preponderance of probability, Noticees 2 to 5 participated in the fraudulent scheme involving misrepresentation of financial statements and disclosure violations which enabled the promoter group to offload their shareholding in BGL. The role played by these Noticees in the company have already been explained in the foregoing paragraphs. Further, Noticees 2 & 3 are the promoters of BGL who directly benefited from this fraudulent scheme. 175. The Interim Order cum SCN also alleges that from September 30, 2014, the share price of BGL had generally declined over a period of time. Had the Company not resorted to accounting irregularities, the C....
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....this regard, I note that even prior to July 2017, the promoter shareholding had come down from 34.38% as of March 2016 to 27.63% as of March 2017. Note that the GDPR was enacted in April 2016, and effective May 2018. In addition, the announcement on June 25, 2020 containing the audited financial results for the year quarter and year ended March 31, 2020, categorized major items such as "impairment" in OCI instead of being classified in profit or loss in the P&L statement. If the "impairment" would have been categorized in profit or loss, financials of FY 2019-20 would have shown loss of INR 251.16 crores in gross profit instead of a profit of INR 617.14 crores. Thus, misleading information was given by BGL. The correct information may have perhaps had a different impact on the views of the investors. Untrue financial statements are bound to distort market prices. The rebuttal made by the Noticees that the prices sharply moved up in 2020 even post the disclosure of the impairment is without merit for 2 reasons. (1) As is already established, this impairment was not done in the profit and loss account of the company, and instead taken below the line into OCI and (2) the sharp rise of....
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....inter alia called upon the Noticees to show cause as to why appropriate penalty should not be imposed upon them under section 15A(b), 15A(c), 15HA and 15HB of the SEBI Act and section 12A(2) read with section 23H of SCRA for the violation of provisions of SEBI Act, LODR Regulations, PFUTP Regulations, PIT Regulations and Listing agreement read with provisions of SCRA, 1956. The relevant extracts of sections 15A(b), 15A(c), 15HA, 15HB of SEBI Act and 23H of SCRA is as under: SEBI Act Sec 15A. If any person, who is required under this Act or any rules or regulations made thereunder, - (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees. (c) to maintain books of account or records, fails to ma....
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....olations and disclosure violations including incorrect shareholding pattern which took place between FYs 2014-15 and 2019-20 enabled the promoters of BGL to offload their shareholding from 40.45% in March 2014 to 3.51% in June 2022. Noticees 2 & 3 were also part of the promoter group, which offloaded their shareholding during this period. I note that Interim Order cum SCN records that "the quantification of unlawful gains made by the promoter group could not be made on account of non-submission of information sought from the Company." In fact, the Interim Order at para 177(i) clearly directed the Noticees to "submit details regarding the date of purported pledges, off-market transfers, copies of loans and pledge agreements, if any, DIS slips, prices at which shares were disposed of and all other relevant documents/ details to SEBI within 15 days from the date of this Order." This direction has not been complied with by all the noticees thereby hindering the computation of actual illegal gains. By being a part of this fraudulent scheme of manipulation of financial statements and disclosure violations, Noticees 1 to 5 have prima facie enabled the promoter group to make illegal gains.....
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....l available on record does not indicate the amount of specific loss caused to investors as a result of the acts of the Noticees or the repetitive nature of such violation. 186. The misrepresented financial statements with inflated profits, along with disclosure violations led to investors not having the true, fair, and timely assessment of financial position of the company. Permitting this situation to continue would undoubtedly harm the interest of the investors. Therefore, in addition to penal or deterrent measure, it is necessary to pass remedial directions as well to correct the distorted picture thereby enabling investors to take an informed decision about their investments. 187. Considering the long period during which the misstatements continued and the persistent non-cooperation with SEBI's investigation and the multifarious violations of law perpetrated by the Noticees, I am of the view that stringent remedial and penal directions are warranted in this case. Since the fraudulent scheme was evidently designed to benefit the promoter directors who offloaded a large portion of their shares, and taking into account their roles as CMD and Whole Time Directors in the listed co....
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....few weeks." Accordingly, I find that BGL has not complied with this direction. 189. As regards the directions issued at paragraph 177(i) of the Interim Order cum SCN issued to the Noticees, I note that except for Noticee 5, other Noticees have failed to comply with the said direction. G. DIRECTIONS 190. In view of the aforesaid findings and having regard to the facts and circumstances of the case, I, in exercise of the powers conferred upon me under Sections 11(1), 11(4), 11(4A), 11B(1) and 11B(2) read with Section 15A(b), 15A(c), 15HA and 15HB of the SEBI Act, and proceedings under Section 12A(2) of SCRA read with Section 23H of SCRA direct as under: (a) Noticees 1 to 5 are restrained from accessing the securities market and prohibited from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever, for the periods listed below, from the date of coming into force of this Order: Noticee No. Noticee name Period of restraint 1. Brightcom Group Ltd. 1 year 2. Mr. M. Suresh Kumar Reddy 5 years 3. Mr. Vijay Kancharla 5 years 4. Mr. Yerradoddi Ramesh Reddy 1 year 5. Mr....