SAT Sets Aside ₹26 Crore SEBI Penalty Against Coffee Day, Directs Fresh Probe Into ₹3,535 Crore Diversion

The Securities Appellate Tribunal (SAT), by a 2:1 majority, has set aside SEBI orders imposing penalties totalling ₹26 crore on Coffee Day Enterprises Limited (CDEL) and directed a fresh investigation into the transfer of ₹3,535 crore from seven of its subsidiaries to Mysore Amalgamated Coffee Estates Limited (MACEL), an entity linked to the company's promoters.

The three-member bench comprised Presiding Officer Justice P.S. Dinesh Kumar and Technical Members Meera Swarup and Dr. Dheeraj Bhatnagar.

The members differed on the ₹1 crore penalty imposed under Section 15HB of the SEBI Act for violations of the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations. However, the ₹25 crore penalty under Section 15HA, concerning alleged fraudulent and unfair trade practices, did not survive.

Justice Dinesh Kumar expressly set aside that penalty, while the majority set aside the entire order passed by SEBI's Whole Time Member.

The majority, comprising the two technical members, held that SEBI's investigation was incomplete and had failed to adequately trace the ultimate beneficiaries of the funds. It set aside the orders passed by SEBI's Whole Time Member on January 24, 2023, and its Adjudicating Officer on March 27, 2023, and directed a fresh investigation.

“Thus, despite clear cash flow of funds and as noted by the learned WTM too in his order, that money could not have vanished from personal accounts of V. G. Siddhartha, his family and related entities, no directions for disgorgement were recommended in the investigation report, particularly, even though Malvika Hegde in her email reply had admitted having received Rs 145 Crore out of it. No inquiries were made to identify the legal representative of (late) VGS for making recovery/ initiating inquiry under section 28-B of the SEBI Act, even though admittedly huge sum of Rs. 3,088 Crore was transferred in his account by MACEL. These persons were not brought within the scope of investigation from the perspective of being ultimate beneficiaries of the fraudulent device of siphoning off of funds of CDEL. The SEBI's investigation is thus incomplete and falls short in its investor protection objective,” the majority observed.

In his separate opinion, Justice Dinesh Kumar set aside the ₹25 crore penalty under Section 15HA but upheld the finding that CDEL had failed to disclose Coffee Day Trading Limited (CDTL) as a material subsidiary for FY 2019-20.

He held that this violated Regulation 16(1)(c), read with Regulation 4(1)(a), of the LODR Regulations. He also reduced the ₹1 crore penalty under Section 15HB to ₹50 lakh.

CDEL is a listed company with 49 subsidiaries. The tribunal recorded that ₹3,535 crore was transferred from seven of these subsidiaries to MACEL. The majority opinion noted that ₹3,088 crore reached V.G. Siddhartha, the group's former chairman, and ₹145 crore went to his wife, Malavika Hegde. It also recorded that funds reached other family members and related entities.

The majority directed SEBI to complete the fresh investigation as early as possible and, in any case, within six months. It further directed the regulator to pass appropriate orders in accordance with law after completing the investigation.

As part of the probe, SEBI may record statements on oath of the persons concerned, including the legal representatives of late Siddhartha, to identify the ultimate beneficiaries of the funds. It may also examine officials of CDEL and its subsidiaries, as well as banks, to ascertain how the transfers took place and whether they were detected by the concerned officials.

The regulator has also been asked to examine the bank accounts of the entities through which the funds moved and their beneficiaries, consider whether Section 28-B of the SEBI Act can be invoked, and investigate possible violations of the SEBI (Prohibition of Insider Trading) Regulations. It must also consider measures to restitute CDEL's public shareholders, including disgorgement of funds from the ultimate beneficiaries.

For Appellant: Senior Advocate Janak Dwarkadas, Advocates Zerick Dastur, Archana Uppuluri, Khushil Shah and Palak Agrawal

For Respondent: Senior Advocate Pradeep Sancheti, Advocates Manish Chhangani, Sumit Yadav, Abhay Chauhan and Atul Agrawal