SEBI Imposes Rs. 1 crore Fine on Mysore Amalgamated Coffee in Coffee Day Enterprises Fund Diversion Case

SEBI Imposes Rs. 1 crore Fine on Mysore Amalgamated Coffee in Coffee Day Enterprises Fund Diversion Case

The Securities Exchange Board of India (SEBI), directed the Mysore Amalgamated Coffee Estates Ltd. (MACEL) to pay a penalty of Rs. 1 crore by the market regulator for ‘aiding and abetting’ Coffee Day Enterprises in the diversion funds to the tune of Rs. 3,535 crore.

The facts of the case is that, Late Mr. V. G. Siddhartha (VGS) who was the then Chairman and MD of Coffee Day Enterprises Limited (CDEL), had reportedly committed suicide in July 29, 2019. It was reported that VGS has left behind a suicide note dated 27 July, 2019 addressed to Board of Directors of CDEL and Coffee Day family wherein it was revealed that he was in deep debt.

Subsequently, in September 2019, the Board of CDEL engaged Shri Ashok Kumar Malhotra, retired DIG of Central Bureau of Investigation and Agastya Legal LLP., inter alia investigated and to scrutinized the books of accounts of CDEL and its subsidiaries.

SEBI also initiated investigation into the matter to ascertain whether funds were diverted from CDEL, a listed entity, to related entities and to the possible violations of the provisions of Securities and Exchange Board of India Act, 1992 (SEBI Act), SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). The period of investigation was from 1 April, 2018 to 31 March, 2020.

The investigation conducted by SEBI revealed that diversion of funds amounting to Rs.3535 Crores from the subsidiaries of CDEL to Mysore Amalgamated Coffee Estates Limited (MACEL/Noticee 1) and from Noticee 1 to entities controlled by VGS and his relatives, which was manipulative, fraudulent and unfair trade practice in securities market and Noticee 1 has been alleged to have violated the provisions of Sections 12A (a), (b) and (c) of SEBI Act and Regulations 3 (b), (c) and (d) and 4 (1) of PFUTP Regulations.

The Adjudicating Officer Sakkeena PV noted that MACEL acted as a pass-through entity for the said fund diversion and has aided and abetted CDEL in such a large-scale fund diversion.

“I am not inclined to accept the contentions raised by MACEL that it had business operations with CDEL and the funds were transferred in lieu of the same. MACEL was acting as a pass-through entity for such large-scale diversion of funds of a listed entity and the shareholders of CDEL were not aware of such large-scale diversion till the time of the demise of VGS. MACEL was also a family concern of CDEL, who without having any financial fundamentals or business operations accepted such huge funds from CDEL and has, therefore, effectively aided, and abetted CDEL in such diversion. I also find that such a huge diversion of funds had impacted the price and had resulted in price fall as alleged in the SCN,” stated the Adjudicating Officer.

The SEBI while referring to the judgment passed by the Supreme Court in the case of SEBI vs. Kanaiyalal Baldevbhai Patel and Others (2017), held that the definition of ‘fraud’ has two parts under Regulation (2)(1)(c), first part may be termed as catch all provision while the second part includes specific instances which are also included as part and parcel of term ‘fraud’. The specific instances that are included under the term ‘fraud’ are, a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment or an active concealment of a fact by a person having knowledge or belief of the fact etc.

In view of the same, the act of diverting funds to the tune of INR 3,535 crore from subsidiaries of CDEL to Noticee 1 and from Noticee 1 to entities controlled by VGS & his relatives, gets squarely covered under the definition of ‘fraud’. In view of the same, SEBI rejected the contention raised by the Noticee 1.

Meanwhile, the regulator dropped allegations revolving around the disclosure of related party transactions, and other charges under the prevention of fraudulent and unfair trade practices against Malavika Hegde, R Ram Mohan and Sadananda Poojary, the promoter director, CFO and compliance officer of the company respectively.

They, however, have been admonished.

“The noticees being the promoter director, CFO and Compliance officer of the listed entity, should have been more cautious and careful and should have followed the spirit of the pre-amended regulation by treating the concerned transactions as related party transactions and following the norms applicable to such transactions. Having said so, considering the fact that the relevant regulations as it stood at the relevant time did not cover transactions involving subsidiaries of a listed company, the allegations levelled against Malavika Hegde, R Ram Mohan and Sadananda Poojary respectively are dropped,” SEBI stated in its order.

Accordingly, the regulator imposed a penalty of Rs. 1 crore on Notice 1 i.e., Mysore Amalgamated Coffee Estates Limited.