SAT Upholds SEBI Action Against Omaxe Limited Over ₹647 Crore Round-Tripping, Calls Transactions Sham

The Securities Appellate Tribunal has recently upheld SEBI's findings against Omaxe Limited, a listed real estate company, and its senior officials over financial misstatements and circular movement of funds.

Observing that the transactions were “not genuine”, the tribunal held that they were designed to “dress up the financial results”. It found that the arrangement created a false impression that the company had strong financials.

It found that the transactions were not genuine. The tribunal held that they were designed to present a better picture of Omaxe's financial performance.

A bench comprising Presiding Officer Justice P.S. Dinesh Kumar and Technical Members Meera Swarup and Dr. Dheeraj Bhatnagar dismissed the appeal. The appeal had been filed by Omaxe, its promoter-chairman Rohtas Goel, Managing Director Mohit Goel, and former Chief Financial Officers Arun Kumar Pandey and Vimal Gupta.

The appeal challenged SEBI's July 30, 2024 order. The order barred the appellants from accessing the securities market for two years. It also prohibited the individual noticees covered by the order from serving as directors or key managerial personnel and imposed monetary penalties.

The proceedings began with a complaint alleging fraudulent transactions and siphoning of funds. It also alleged misrepresentation in Omaxe's financial statements and inflated turnover.

SEBI conducted a forensic audit covering the period from April 2018 to March 2021. It later issued notices to 16 entities and individuals. The allegations included misstated financial statements, inflated sales and expenses, and violations of disclosure requirements.

The appellants sought relief from the market-access restrictions. They also pressed for a reduction in the monetary penalties, arguing that the penalties were disproportionate.

They maintained that the transactions involving Omaxe, its subsidiaries and Jeet Builders Private Limited (JBPL) were legally valid. They argued that SEBI had wrongly concluded that revenue from these transactions was not accounted for according to applicable accounting standards.

The appellants also contended that SEBI had wrongly found violations of rules governing listed companies' disclosure obligations and regulations that prohibit fraudulent and unfair practices in the securities market.

SEBI, however, alleged that the entities had engaged in circular movement of funds to book profits. It pointed to transactions in which money moved from Omaxe to its wholly owned subsidiaries, Garv and Pancham.

The money then moved to JBPL before returning to Omaxe. In all, ₹647.73 crore was shown as consideration received by Omaxe from JBPL.

The tribunal examined a memorandum of understanding dated October 24, 2013 between Garv and Omaxe. Under the arrangement, Omaxe had paid ₹8.77 crore. Garv agreed to allot 130 plots to it.

Omaxe subsequently entered into agreements with JBPL to sell the rights in those plots. JBPL, in turn, offered to sell its rights back to Garv and Pancham at a premium.

The tribunal found this arrangement unusual. It observed,

“If JBPL had sold its rights to any third party, it is a normal transaction. Appellants' argument is, Garv and Pancham had agreed to buy-back their rights from JBPL. This is wholly unnatural.”

The tribunal then examined how the money moved between the entities. On several dates, Omaxe transferred funds to Garv and Pancham. The subsidiaries then transferred money to JBPL. JBPL transferred funds back to Omaxe on the very same day.

After analysing these transactions, the tribunal ruled that the apparent revenue from the sale of rights to JBPL was based on “camouflaged sham transactions”. It held that the arrangement was designed to project revenue rather than reflect genuine transactions.

The tribunal also rejected the appellants' request for leniency in the monetary penalties. It observed,

“This is one of the classic cases in which gullible investors are induced to invest by misrepresentation of financials. The round tripping of money between Omaxe, its subsidiaries and JBPL recorded hereinabove establishes that the transactions were not genuine and designed to dress up the financial results to give a false impression that the listed company had good financials.”

The tribunal further noted that Omaxe's subsidiaries had acquired land from the Uttar Pradesh Government using Omaxe's funds. The subsidiaries then sought to sell the land to Omaxe.

Omaxe, in turn, sought to sell the plots to JBPL. There were no registered conveyance deeds transferring the properties from Garv and Pancham to Omaxe, the tribunal noted.

Omaxe therefore had no title to the properties when it offered to sell the plots to JBPL. The tribunal also found that JBPL had no title when it offered to sell the properties back to Garv and Pancham.

“This is nothing but a series of fraudulent 'make believe' financial transactions. The PFUTP violation is largely writ on the face of each transaction,” the tribunal ruled.

Accordingly, the tribunal dismissed the appeal. It also rejected the request to take a lenient view on the monetary penalties

For Appellants: Senior Advocate Pradeep Sancheti, Advocates Tomu Francis, Zarnaab Aswad, Apoorva Upadhyay and Tarun Toprani

For Respondent: Advocates Suraj Chaudhary, Ratan Sing and Sagar Dhakane