SEBI Imposes ₹29.15 Crore Penalty on Suzlon Energy, Directors, Officials Over Misleading Financial Disclosures

The Securities and Exchange Board of India (SEBI) has imposed penalties totalling ₹29.15 crore on Suzlon Energy Ltd. and two of its senior officials, two directors, after concluding that a series of intra-group transactions and financial disclosures created a misleading picture of the company's financial position.

The order was passed by SEBI Whole Time Member Sandip Pradhan. The regulator found that Suzlon recognised gains from transactions involving the transfer of its operation and maintenance services business to subsidiaries.

It also found that an exposure of about ₹4,050 crore was no longer disclosed as a contingent liability despite there being no change in the terms of the underlying arrangement.

The proceedings arose from an investigation into Suzlon Energy's affairs between FY2014-15 and FY2019-20 and the first three quarters of FY2020-21 following an anonymous complaint alleging irregularities in transactions involving the company and its subsidiaries.

SEBI examined the sale of Suzlon's operation and maintenance services business to wholly owned subsidiary Suzlon Global Services Ltd for ₹2,000 crore in March 2014. According to the regulator, the business had a stated value of ₹77.08 crore and the transaction enabled the company to recognise a gain of ₹1,922.92 crore.

SEBI also examined the subsequent transfer of Suzlon Global Services shares to another wholly owned subsidiary, Suzlon Structures Ltd, which resulted in an additional gain of ₹829.78 crore being recognised by Suzlon. The regulator further found that an exposure of about ₹4,050 crore under a Stand-by Letter of Credit was no longer disclosed as a contingent liability in FY2017-18 after being treated as an insurance contract.

The noticees argued that the transactions were genuine commercial decisions undertaken as part of restructuring and financing measures during a period of financial stress. They contended that the transactions had been approved by the board and shareholders, disclosed to stock exchanges and supported by independent valuation reports.

They also argued that the transactions did not cause any actual loss to investors or the securities market. According to the noticees, regulators could not substitute their judgment for the commercial wisdom of a company's management.

Rejecting that defence, regulator observed that commercial wisdom could not be used as a blanket defence where transactions were alleged to be non-genuine or misleading.

“However, such principle cannot be elevated into a blanket defence in circumstances where the very substance and effect of the transactions are alleged to be non-genuine or misleading from the standpoint of securities market disclosures and investor perception.”, it noted

The Whole Time Member also rejected the contention that the absence of a quantifiable investor loss meant the securities market had not been affected.

“The integrity of disclosures and genuineness of financial reporting by listed entities constitute foundational elements of an orderly securities market.”, it noted.

He further observed that transactions creating a misleading financial picture could affect investor perception, valuation and market confidence.

“Any transaction or arrangement alleged to create a misleading financial picture has the potential to influence investor perception, valuation and market confidence, and therefore directly impacts the interests of the securities market.”it noted

On the seriousness of the violations, regulator observed:

“I note that, the violations established in this order are serious in nature as they relate to financial statements and disclosures of a listed entity, which constitute the basis on which investors and market participants assess the financial position and prospects of such entity.”

SEBI set aside an earlier adjudication order that had exonerated the noticees. It imposed a penalty of ₹15.95 crore on Suzlon Energy. Non-executive director Vinod R. Tanti was fined ₹5.75 crore, while non-executive director Girish R. Tanti was fined ₹5.45 crore. Group Chief Finance Officer Kirti J. Vagadia was directed to pay ₹1.5 crore and Chief Finance Officer Amit Agarwal ₹30 lakh. The noticees have been directed to pay the penalties within 45 days.