SEBI Penalises Kishore, Rakesh Biyani, Ex-Future Retail CFO ₹50 Lakh Over Disclosure Lapses

The Securities and Exchange Board of India (SEBI) on Tuesday imposed a consolidated penalty of ₹50 lakh on Future Retail founder Kishore Biyani, former managing director Rakesh Biyani, and the company's former chief financial officer C.P. Toshniwal for disclosure violations relating to related party transactions involving the company.

SEBI's Quasi Judicial Authority Santosh Shukla passed the order.

The proceedings concern alleged securities law violations by promoters of Future Retail Limited (FRL), its key managerial personnel, audit committee members, and persons linked to the company's statutory audit function in relation to the company's affairs.

The other noticees were former deputy company secretary and compliance officer Virendra Samani; audit committee members Gagan Singh, Ravindra Dhariwal, and Sridevi Badiga; and persons linked to the statutory audit function, Ashok Trivedi, Ravi Ajwani, Lokesh Khandelia and Raghav Kalyani.

FRL was admitted into the Corporate Insolvency Resolution Process by the NCLT on July 20, 2022 and is presently undergoing liquidation proceedings.

SEBI commenced an investigation on June 3, 2022 into whether FRL's books of accounts had been manipulated and whether there had been wrongful diversion or siphoning of funds by promoters, directors or key managerial personnel during FYs 2019-20 to 2021-22, including possible violations of the PFUTP Regulations, LODR Regulations, and the SEBI Act.

SEBI thereafter appointed Chokshi & Chokshi LLP as forensic auditors to examine related party transactions involving FRL, Future Consumer Limited, Future Supply Chain Solutions Limited and Future Enterprises Limited, along with utilisation of debt and transactions linked to the Reliance Group.

The forensic audit report and investigation report prima facie identified alleged misleading disclosures and non-disclosures relating to related party transactions, FRL's debt and liabilities, and events surrounding the proposed scheme of arrangement with the Reliance Group.

Based on the findings, SEBI issued a common show cause notice.

During the proceedings, certain noticees sought cross-examination of the forensic auditor, which was allowed. Settlement applications filed by some noticees were subsequently rejected by SEBI's Whole Time Members.

SEBI rejected Kishore Biyani's objection that proceedings against him were barred because of the interim moratorium under Section 96 of the Insolvency and Bankruptcy Code. Referring to precedents, the regulator held:

“I, therefore, find that the interim moratorium under Section 96 of IBC does not apply to the initiation, commencement, continuance and disposal of the instant proceedings before SEBI and imposition of penalties under the SEBI Act much less to the action taken or penalties accruing in future after filing of application under Section 94 or 95 of IBC, as the case may be. I, therefore, reject this technical contention of Noticee No.1."

It further held that there was no conflict between the SEBI Act and the IBC.

On merits, SEBI found that acts of FRL and the concerned noticees violated provisions of the SEBI Act, PFUTP Regulations and LODR Regulations by failing to disclose material related party transactions.

SEBI observed that transactions involving approximately ₹1,347 crore routed through Future Enterprises Limited and related entities ought to have been disclosed as related-party transactions requiring audit committee approval.

“I, therefore, find that FRL violated the provisions of Regulation 23(2) and 30(4) read with Clause 1 of Part A of Schedule V and Regulation 48 of the LODR Regulations. FRL also failed to adhere to the principles enumerated in Regulation 4(1)(c), (g), (h), (i) and (j) of the LODR Regulations. Accordingly, Noticees No. 1, 2 and 3 are liable for these violations.”

SEBI rejected their argument that the transactions were in the ordinary course of business and therefore exempt from compliance requirements.

“Regulation 48 obligates all listed entities to comply with all the applicable Accounting Standards. As discussed hereinabove, Ind AS 24 provides the accounting standards for 'Related Party Disclosures'. None of these requirements create any exception regarding transactions in ordinary course of business. Thus, the approval of all RPTs by Audit Committee as per Regulation 23(2) and disclosure of all related parties and RPTs in Annual Report is obligatory for all listed entities under Regulation 34(3) read with Clause 1 of Part A of Schedule V and Regulation 48 read with Ind AS 24.”

It added, “Thus, loan or security deposits, whatsoever between FRL and said 10 related parties attracted compliance obligations under the LODR Regulations.”

On the allegation of misleading or non-disclosure of events surrounding the scheme of arrangement with the Reliance Group, the regulator held that FRL had made adequate disclosures.

SEBI also rejected certain allegations relating to valuation mismatches, store counts and certain disclosure allegations connected to the Reliance scheme after finding insufficient material to sustain those charges.

Accordingly, SEBI imposed a penalty of ₹20 lakh on Kishore Biyani, ₹15 lakh on Rakesh Biyani, and ₹15 lakh on C.P. Toshniwal, aggregating to ₹50 lakh.