Eros International Case: SAT Refuses To Interfere With SEBI's Interim Order

Eros and four others had allegedly misrepresented financial statements and siphoned funds.

<div class="paragraphs"><p>Securities and Exchange Board of India signage. (Source: Vijay Sartape BQ Prime)</p></div>
Securities and Exchange Board of India signage. (Source: Vijay Sartape BQ Prime)

The Securities Appellate Tribunal refused on Tuesday to interfere with an interim order of SEBI barring Eros International Media Ltd., Managing Director Sunil Arjan Lulla and CEO Pradeep Dwivedi from the securities market.

Eros and others have been directed to file a reply with the market regulator within three weeks. The Securities and Exchange Board of India has been asked to fix a hearing date within a week of the reply and pass the final order within three weeks of the hearing.

The tribunal had reserved its orders on July 13.

In an interim ex-parte order on June 22, SEBI had barred Eros and four others, including Lulla and Dwivedi, from accessing the securities market for alleged misrepresentation of financial statements and siphoning off funds. The regulator had also barred Lulla and Dwivedi from holding any key positions in any listed company until further orders.

In 2012–2013 and 2019–2020, Eros made misstatements in the books of the accounts of the company to divert funds to its related parties in violation of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, according to the regulator,

In its investigation, SEBI found that the company entered into agreements with several companies to develop films and with several others to distribute content. On the failure of these companies to pay the debts and deliver the content, Eros wrote-off Rs 520 crore and Rs 1,553 crore respectively for distribution rights and in terms of content development advances. Eros allegedly diverted Rs 687 crore through this write-off. It was later found that the companies were fictitious and had a common directorship with Eros in 11 out of 18 instances.

Eros appealed against the interim order before the SAT. During the hearing, it was argued that the appointment and removal of directors is governed by the Companies Act and therefore, outside SEBI's purview.

It was also argued that there was a gross violation of natural justice, as the company would have shown that the write-offs were valid if given the opportunity. Arguments were also made against the delay in SEBI's order as some of the transactions date back to 2012. The regulator also failed to establish market manipulation, an ingredient key to an offense under PFUTP Regulations, according to Eros.

On the other hand, SEBI argued that there was a continuous misrepresentation of the financial statements of Eros. The company, according to it, was potentially diverting funds to Eros' overseas entities. The fact that the company has not taken any efforts to recover the dues strengthens the allegation of siphoning, SEBI said.

In its detailed order, the tribunal found merit in the arguments put forward by SEBI.

According to it, SEBI was right in passing an interim order as it was done to prevent continuous misrepresentation of the financials and a possible diversion of funds to overseas entities and connected entities of Eros.

Moreover, there is no evidence to prove that the figures shown in the interim order regarding fund diversion were incorrect. It was further held that there was no violation of natural justice in this case, as an opportunity of hearing could have been availed of on filing replies with the regulator. In light of the findings, the tribunal found no reason to interfere with the orders of SEBI.

Recently, the tribunal had refused to entertain a similar plea by Zee promoters Punit Goenka and Subhash Chandra against an interim order of SEBI barring them from boards of companies.