SAT Slams SEBI’s ‘Late, Lacklustre’ Probe into Alleged Rs 3,535-Crore Coffee Day Fund Diversion, Orders Fresh Investigation

The Securities Appellate Tribunal (SAT) has strongly criticised the Securities and Exchange Board of India’s (SEBI) investigation into the alleged diversion of Rs 3,535 crore from seven subsidiaries of Coffee Day Enterprises Ltd (CDEL). Describing the probe as “late”, “lacklustre” and “incomplete”, the tribunal’s majority has directed SEBI to conduct a fresh, independent and comprehensive investigation within six months.

The majority ruling said the regulator had failed to independently establish the complete movement of funds, examine the possible role of promoters and identify all beneficiaries. The tribunal also raised concerns about the limited recovery of money, with only Rs 110.75 crore recovered against the alleged diversion of Rs 3,535 crore.

Key Highlights

• SAT’s majority bench criticised SEBI’s investigation into the alleged Rs 3,535-crore Coffee Day fund diversion.
• The tribunal ordered a fresh and comprehensive investigation to be completed within six months.
• Only Rs 110.75 crore has been recovered against the alleged diversion of Rs 3,535 crore.
• SEBI must examine the complete fund trail, possible promoter involvement, beneficiaries and suspected insider trading.
• Presiding Officer Justice PS Dinesh Kumar issued a differing opinion and set aside or reduced certain penalties against CDEL and MACEL.

Why SAT Criticised SEBI’s Coffee Day Investigation

In its majority opinion, Technical Members Dr Dheeraj Bhatnagar and Meera Swarup said SEBI’s investigation did not adequately examine the alleged siphoning of funds or independently establish where the money ultimately went.

Technical Member Bhatnagar observed that the regulator’s investigation was largely based on the findings and scope of the Malhotra committee appointed by CDEL. According to the majority, relying heavily on the company’s internal committee did not adequately serve the objective of investor protection.

The tribunal also questioned whether SEBI had independently verified important claims and examined the possible involvement of promoters, company officials and other individuals who may have benefited from the transactions.

How the Alleged Rs 3,535-Crore Fund Diversion Took Place

The alleged transactions took place between April 2018 and July 2019. Funds were transferred from seven subsidiaries of Coffee Day Enterprises to Mysore Amalgamated Coffee Estates Ltd (MACEL), an unlisted company in which 91.75% was owned by the father of late Coffee Day founder V.G. Siddhartha.

Subsequent investigations found that approximately Rs 3,088 crore of the transferred amount went to Siddhartha, while Rs 145 crore went to his wife, Malavika Hegde, who currently serves as CDEL’s chief executive officer and managing director.

Siddhartha died by suicide in July 2019. A note recovered after his death stated that he alone was responsible for his financial transactions. However, SAT’s majority questioned whether SEBI had adequately verified this claim and examined the responsibilities of other individuals connected with the transactions.

SAT Questions SEBI’s Handling of Statements and Bank Transactions

The majority bench raised concerns about SEBI’s decision to allow Malavika Hegde to submit her response through email instead of recording her statement on oath.

Technical Member Bhatnagar also questioned why the regulator had not independently established Siddhartha’s claim that he was solely responsible for the financial dealings. The majority said the investigation should examine the role of relevant company officials and bank personnel involved in processing the transfers.

The tribunal also questioned whether banks should have detected or flagged transactions involving such substantial amounts. It directed SEBI to examine the circumstances surrounding the movement of funds and the responsibilities of those involved.

Only Rs 110.75 Crore Recovered So Far

One of SAT’s major concerns was the limited recovery of money compared with the amount allegedly diverted. Against the total alleged diversion of Rs 3,535 crore, only Rs 110.75 crore had been recovered so far.

The majority questioned why SEBI had not adequately pursued disgorgement and other recovery proceedings against the beneficiaries. It also referred to Section 28-B of the SEBI Act, which provides for recovery of amounts from the legal representatives of a deceased person.

The tribunal directed SEBI to examine whether this provision could apply in the Coffee Day case. It also referred to findings by the National Financial Reporting Authority (NFRA), which had identified the transactions as involving cheating and a predicate offence under money-laundering law.

The recovery issue is significant for CDEL’s public shareholders because the alleged transactions involved funds transferred out of the company’s subsidiaries. The majority said SEBI should consider appropriate restitution or disgorgement measures to compensate affected public shareholders, subject to the outcome of the fresh investigation.

Fresh Probe to Examine Promoters and Possible Insider Trading

SAT’s majority identified another important area requiring investigation: whether promoters who were allegedly aware of the group’s deteriorating financial position had pledged their shares and subsequently avoided losses following the sale of those shares.

The tribunal said these circumstances required closer scrutiny, including an examination of possible violations of insider-trading regulations. It directed SEBI to investigate whether promoters or other connected individuals had access to unpublished price-sensitive information and whether any trading activity breached applicable rules.

The fresh investigation must also establish the complete movement of funds through intermediary or conduit entities and identify the ultimate beneficiaries. SEBI has been directed to record statements on oath from concerned individuals, including Siddhartha’s legal representatives, and examine relevant company officials and bank personnel.

What SEBI Must Complete Within Six Months

The majority bench has directed the regulator to undertake a wider investigation rather than confine its work to the findings of the Malhotra committee. The key areas include:

• Complete fund trail: Trace transfers through bank accounts of intermediary entities and identify the ultimate recipients.
• Promoter involvement: Independently examine the role of promoters and other individuals connected with the transactions.
• Statements on oath: Record statements from relevant individuals, including Siddhartha’s legal representatives.
• Bank and company officials: Investigate the role of personnel involved in authorising and processing the transactions.
• Insider-trading concerns: Examine share pledges, subsequent sales and possible violations of securities regulations.
• Recovery and restitution: Consider disgorgement and other measures to recover money and compensate CDEL’s public shareholders.

The tribunal clarified that its observations should not influence the final outcome of the fresh investigation. SEBI must independently examine the evidence and reach its conclusions within the six-month deadline.

Presiding Officer Justice PS Dinesh Kumar Disagrees

Although the majority ordered a fresh investigation, Presiding Officer Justice PS Dinesh Kumar took a different view on the legal sustainability of SEBI’s original findings against CDEL.

Justice Kumar observed that related-party approval requirements did not cover transactions between a holding company and its subsidiaries until April 2022. He also noted that the transfers had been made through cheques signed by authorised signatories of the subsidiaries.

He further held that SEBI had not adequately identified the directors or key managerial personnel responsible for the transactions. According to his opinion, Siddhartha’s actions could not automatically be attributed to the company.

Justice Kumar set aside the Rs 25 crore fraud penalty imposed on CDEL and reduced the Rs 1 crore penalty for disclosure violations to Rs 50 lakh. He also allowed MACEL’s appeal while leaving SEBI’s recovery directions largely intact.

The two technical members’ majority opinion, however, resulted in the direction for a fresh investigation into the alleged fund diversion and related regulatory concerns.

What the SAT Ruling Means for Coffee Day Shareholders

The ruling puts renewed focus on investor protection, Corporate Governance and the responsibility of market regulators to investigate complex financial transactions independently. For Coffee Day Enterprises’ public shareholders, the central concern is whether the missing funds can be traced and whether any money can be recovered through further proceedings.

The investigation could also clarify whether individuals beyond those already identified were involved in the alleged transactions or benefited from them. However, the tribunal’s directions do not establish the liability of every person who may be examined during the fresh probe.

The six-month deadline gives SEBI a defined period to investigate the fund trail, examine possible insider trading and consider recovery measures. The outcome will depend on the evidence gathered during the new investigation.

Conclusion

SAT’s majority has delivered a strong criticism of SEBI’s handling of the alleged Rs 3,535-crore Coffee Day fund diversion, directing the regulator to conduct a fresh investigation within six months. The tribunal highlighted gaps in tracing the money, examining promoter involvement and pursuing recovery from beneficiaries.

With only Rs 110.75 crore recovered so far, the fresh probe will be important for determining the complete fund trail and assessing possible regulatory violations. The differing opinion of the presiding officer also highlights the legal questions surrounding corporate responsibility and the penalties imposed in the case. For investors, the key developments to watch will be SEBI’s findings and whether further recovery can be achieved.