SAT Stays SEBI Order Directing Setco Automotive Promoters To Bring Back ₹208.77 Crore

The Securities Appellate Tribunal (SAT) has recently stayed SEBI's direction requiring Setco Automotive promoters to bring back ₹208.77 crore in an alleged fund diversion case, prima facie holding that a regulator cannot override lawful shareholder-approved business decisions.

“In our view, shareholders' opinion and business decision, if they are lawful, cannot be substituted by the Regulator.”

The interim relief was granted by Presiding Officer Justice P.S. Dinesh Kumar, Technical Member Meera Swarup, and Technical Member Dr. Dheeraj Bhatnagar, subject to the appellants depositing the full penalty amount within four weeks.

The case arose from SEBI's investigation into the financial statements of Setco Automotive Limited, a listed clutch manufacturer, for FY 2019-20 to FY 2021-22. SEBI alleged that out of ₹615 crore infused by India Resurgence Fund into the company and its subsidiary during financial distress, ₹107.76 crore was transferred to promoter-linked Setco Engineering Private Limited as a one-time marketing commission payment, while another ₹101 crore was invested in preference shares of the same entity.

By its February 5, 2026 order, SEBI directed the promoters to bring back about ₹208.77 crore, besides imposing penalties and market restrictions.

Appearing for the appellants, Senior Advocate Pesi Modi argued that the funding package was the only viable chance for the company's survival when it was unable to raise money from banks or NBFCs. He submitted that all terms of the restructuring, including the one-time compensation payment, were approved by the Board, Audit Committee and shareholders, with promoters abstaining from voting and over 99% of public shareholders approving the resolutions.

The tribunal noted that the proposal to pay ₹100 crore to ₹110 crore to Setco Engineering was fully disclosed to minority shareholders.

"Thus, three things are clear. Firstly, the proposal to make a payment of ₹100-110 Crore to SEPL was placed for consideration of the minority of shareholders. Secondly, 99% minority shareholders have approved the resolution. Thirdly, the appellants and SEPL who are SAL's promoters have abstained from voting. This leads to an inference that the investors in the company consented to the affairs of the company wholly uninfluenced by the promoters who had abstained from voting. In our view, shareholders' opinion and business decision, if they are lawful, cannot be substituted by the Regulator. ”, it said.

SEBI, represented by Senior Advocate Pradeep Sancheti, opposed the stay, calling it “a classic case of diversion” of company funds by promoters. It argued that the promoters had strategically transferred the clutch business to a subsidiary and allegedly channelled company funds to promoter-linked entities, ultimately burdening investors since the company would have to repay the loan.

On the ₹101 crore preference share investment, the tribunal found an apparent contradiction in SEBI's order, noting that the quasi-judicial authority had itself recorded that the investment was approved by the Audit Committee and properly disclosed in financial statements.

“This finding runs counter to QJA's direction in para 118(c) to pay or bring back the money.”

The tribunal prima facie found merit in the appellants' contention that immediate enforcement could destabilise the company, noting that the promoters had pledged their shares, mortgaged personal properties and furnished personal guarantees to secure the ₹615 crore funding.

“We may record that investors' interest is paramount.”

“It is probable that an adverse order against the promoters of the company may prompt the lenders from invoking the guarantees and pledges which may lead the company into liquidation and that is not in the interest of investors.”

Accordingly, SAT stayed the SEBI order subject to deposit of the full penalty amount, an undertaking that the appellants will not access the securities market, and a restraint on dealing with personal movable or immovable assets without SEBI's prior approval.

For Appellants: Senior Advocate Pesi Modi with Advocates Rushin Kapadia, Sameer Pandit, Krina Gandhi, Chandani Turakhiya, instructed by Wadia Ghandy & Co.

For Respondent (SEBI): Senior Advocate Pradeep Sancheti with Advocates Ravishekhar Pandey and Ankit Ujjwal, instructed by Agama Law Associates.