As the securities market regulator in India, Securities and Exchange Board of India (“SEBI”) is vested with the duty and power to protect the interest of the investors in the securities market and take necessary actions to ensure such protection. The SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”) under Regulation 4 inter alia prohibit listed companies from misrepresentation of financial information to recognised stock exchanges and investors. Regulation 17(8) of the LODR Regulations requires the chief executive officer and chief financial officer of the company to review the financial statements and the cash flow statement for the financial year and certify that to the best of their knowledge and belief, the statements do not contain any “materially untrue statement or omit any material fact or contain statements that might be misleading and that such statements together present a true and fair view of the listed entity’s affairs and are in compliance with existing accounting standards, applicable laws and regulations”.

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“FUTP Regulations”) provide a blanket prohibition on any act of a fraudulent nature in connection with dealing of securities and in particular prohibit (under Regulation 4) any act or omission amounting to manipulation of the price of a security. Additionally, the FUTP Regulations provide that “any act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price shall be construed as fraudulent”.

The Ministry of Corporate Affairs (“MCA”) issued letter no. F. No. 03/73/2017-CL-II dated June 9, 2017 (“MCA Letter”) to SEBI vide which MCA had annexed a list of 331 “shell companies” including Parsvnath Developers Limited (“PDL”). PDL is a major listed company in the real estate construction and development space. “Shell company”, though not defined under any legislation in India, is understood as any corporation which does not undertake any genuine business and is incorporated for ulterior motives such as money laundering. Notably, MCA has entered into a memorandum of understanding with Central Board of Direct Taxes for data exchange on September 6, 2017.

In this note we have analyzed two significant orders of SEBI including the different aspects considered by SEBI in making a prima facie opinion if there was a misrepresentation of the financial statements and assessing the liability of the key managerial personnel (“KMPs”).

SEBI Interim Order of 8 August, 2018 in the matter of Parsvnath Developers Limited: SEBI took note of the MCA Letter and issued a letter dated August 7, 2017 (“SEBI Letter”) vide which SEBI placed trading restrictions on the promoters and directors on their shareholdings in such listed shell companies. SEBI also imposed severe trading restrictions on the scips for general investors.

In this order, SEBI clearly was of the view that the listed companies,  the names of which   are  included   as  shell companies by MCA, were potentially involved in misrepresentation including of its financials and its business and possible violation of LODR Regulations for misusing the books of accounts/funds   of the company.

This included facilitation  of “accommodation”  accounting  entries to the  detriment of minority  shareholders. SEBI  noted  the following to make a prima facie conclusion that PDL has manipulated and misrepresented of its reported financial statements:

1. Submission of vague details in the agreements and invoices of the contracts/subcontracts undertaken by the company and absence of substantial details which may  confirm actual work being carried out.

For instance, an agreement with respect to land levelling specified the names of the village without any reference to the identifiable land records (for e.g. khasra number/plot number, date of actual details of the commencement of work and completion of work etc.) – this was viewed as vague by SEBI.

2. Given (1) above, misuse of the books of accounts and funds of the company by reflecting the invoice amounts. These were viewed as “accommodation entries”.

3. Sub-contracting of work without it being monitored by the management of the company- in this case, the company was unable to produce actual working papers with regard to the sub-contracts.

4. Revenue recognition by the company in violation of accounting standards, given that a construction company cannot recognize revenue from contracts without being able to identify the stage of the contract activity (given the absence of work completion certificates). Another instance is booking income in its books of accounts on contracts

which have a non-identifiable nature of subject matter and thus are non-executable. Here, PDL had accepted contracts in respect of lands which were unidentifiable and thus such contracts were not capable of being performed. SEBI raised prima facie suspicion that PDL had knowingly entered into such non-executable contracts to inflate revenue figures. On a related point, PDL had been raising invoices which did not appear to be supported by work completion certificates.

5. Failure to produce documents such as visit report of engineer, computation of cost of projects, site photographs, travel expenses, actual working papers and invoices. Status of the matter: The final order by SEBI is due in the matter. Meanwhile, SEBI has directed the National Stock Exchange of India Limited to conduct a forensic audit of the affairs of the company. SEBI has also ordered that the restrictions imposed in the SEBI Letter shall continue to operate against PDL. The SEBI Letter envisages, on the final determination, delisting of companies from the stock exchange, if warranted.

SEBI Interim Order Dated August 16, 2018 in the matter of Ricoh India Limited:

SEBI received a letter dated 20 April 20, 2016 from Ricoh India Limited (“Ricoh”), a public listed company, wherein Ricoh, on the basis of preliminary findings of a forensic review of its books of accounts by an independent auditor appointed by it, inter alia stated that its financial statements did not reflect true and fair view of its state of affairs and requested SEBI to conduct an investigation inter alia in respect of possible violations of provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 pertaining to the said incorrect financial statements of Ricoh. A study of the interim order of SEBI brings out the following points which could go against the company/KMPs:

1. No documentation of the basis of assessment of the credit worthiness of the customers to whom the credit was being extended.

2. Evidence of supporting documents being created post-facto for audit purposes. For instance, purchase order formats of two or more unrelated customers appeared similar and paradoxically differences being found in the purchase order formats raised by the customer. Back-dated recording of revenues to meet company’s monthly revenue forecast for instance a majority of the suspect transactions though having been recorded after month-end were dated on the last day of the relevant month.

4. Suspect sales being delivered to non-existent/non-traceable addresses.

5. Absence of any pre-sales efforts by company to procure the customer orders.

6. Entering into circuitous transactions for instance, X purchasing goods from Ricoh and Ricoh procuring those goods from Y and Y in turn purchasing the same goods from X.

7. KMPs receiving personal favours like payment of education abroad for children of KMPs by the customers of company.

8. Payments being made to select debtors for purchases despite amounts outstanding from them for sales made to them.

9. Bank statements of clients of the company showing back-to-back receipts from Ricoh and such funds being transferred by the clients of Ricoh to various companies in which the spouses of KMPs are directors.

Status of the matter: An independent auditor appointed by the Bombay Stock Exchange Limited is conducting a detailed forensic audit of the books of accounts of Ricoh. SEBI is yet to give its final order on the matter. Meanwhile, the KMPs who are suspected of being involved in the alleged violations are restrained by SEBI from accessing the securities market or buying, selling or otherwise dealing in the securities market in any manner whatsoever, either directly or indirectly.


It is disturbing to note this level of accounting irregularities in prominent Indian listed companies. The interim SEBI orders closely examine the alleged fraudulent financial practices of two major listed companies. The granularity of factual detail in both orders as well as SEBI’s decision to direct forensic audits is indicative of the gravity of the potential offences. This also indicates an era where promoters and key managerial personnel of prominent listed companies are held increasingly accountable.


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