₹647.73-crore round-tripping to dress up Omaxe’s financials: SAT upholds SEBI’s two-year market ban

Omaxe Limited, a listed company, was investigated by SEBI following allegations of fraudulent transactions, fund siphoning, inflated turnover and misrepresentation in its financial statements.

SEBI’s forensic audit covered the period from 1 April 2018 to 31 March 2021 and identified, inter alia, alleged circular transactions involving Omaxe, its wholly owned subsidiaries Garv Buildtech Pvt. Ltd. and Pancham Realcon Pvt. Ltd., and Jeet Builders Pvt. Ltd. (“JBPL”); overstatement of land-sale revenue to Pullback Apparels Pvt. Ltd.; fictitious consultancy revenue; and other accounting and disclosure irregularities.

Following a show-cause notice to 16 noticees, SEBI’s Adjudicating Officer held that violations of the SEBI Act, the PFUTP Regulations and the LODR Regulations were substantially established.

By order dated 30 July 2024, SEBI restrained the appellants from accessing the securities market for two years, prohibited certain individual noticees from acting as directors or KMPs, and imposed monetary penalties.

The appellants challenged that order under Section 15T of the SEBI Act.

1. Whether the findings that Omaxe and the concerned appellants had engaged in sham, circular and misleading transactions resulting in misstatement or misrepresentation of the company’s consolidated financial statements were sustainable.

2. Whether Omaxe had unlawfully overstated revenue from the alleged sale of land to Pullback Apparels in the financial year 2020–21, when the sale deed was executed only after the end of that financial year.

3. Whether the securities-market debarment and other regulatory directions had effectively been complied with because the appellants had voluntarily refrained from accessing the securities market during the relevant period.

4. Whether the monetary penalties imposed by SEBI were disproportionate and required reduction under the doctrine of proportionality.

The Tribunal applied Sections 11(1), 11(4), 11(4A), 11B(1), 11B(2), 15A(a), 15HA and 15HB of the SEBI Act, 1992, together with the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which prohibit fraudulent or unfair conduct, require truthful financial and disclosure practices, and empower SEBI to issue protective and remedial directions and impose penalties.

The Tribunal applied the preponderance-of-probabilities standard in assessing the regulatory charges.

It also relied on the accounting principle that revenue from sale of land is recognised only when the significant risks and rewards of ownership have passed to the buyer, as reflected in the relevant ICAI guidance note.

It further held that rights and obligations in immovable property are transferred through execution and registration of a deed of conveyance under the applicable registration law.

The doctrine of proportionality was considered in relation to the penalties, but the Tribunal declined to grant relief in view of the gravity and nature of the violations.

The Tribunal found that Garv and Pancham, although the owners of the relevant land and wholly owned subsidiaries of Omaxe, had received funds from Omaxe, transferred substantially identical amounts to JBPL, and thereafter received funds from JBPL, while JBPL transferred the proceeds back to Omaxe on the same dates.

The same-day movement of funds—totalling approximately ₹647.73 crore from JBPL to Omaxe—demonstrated circular fund flows rather than genuine commercial sales.

The Tribunal considered the alleged resale by JBPL of its contractual rights to the original land-owning subsidiaries to be commercially unnatural and concluded that the transactions were designed to create ostensible revenue and dress up Omaxe’s financial results.

In relation to Pullback, the Tribunal held that the amount received in January 2021 could not be recognised as revenue for FY 2020–21 because the sale deed was executed only on 25 June 2021 and Pullback itself recorded the amount as an advance.

The Tribunal also rejected the proportionality plea, characterising the conduct as a serious attempt to mislead investors through manipulated financial statements rather than as minor or technical irregularities.

It rejected the plea that voluntary non-access to the securities market amounted to compliance with, or justified interference with, the debarment direction and declined to reduce the monetary penalties on proportionality grounds.

The appeal was dismissed, pending interlocutory applications were disposed of, and no order as to costs was made.