SEBI Rejects Bajaj Hindusthan Jurisdiction Plea in Rs 493 Crore Fund Diversion Probe: Key Takeaways

The Securities and Exchange Board of India (SEBI) has rejected preliminary objections raised by Bajaj Hindusthan Sugar Limited and its promoters in an investigation into alleged fund diversion worth hundreds of crores. The probe concerns the alleged diversion of company funds through Ojas Industries and Bajaj Power Generation, along with non-disclosure of related party transactions (RPTs). SEBI overruled the company's contention that the regulator lacked jurisdiction to investigate the matter, holding that the investigation falls squarely within SEBI's mandate to protect investor interests and ensure market integrity under the SEBI Act, 1992, and the LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Background of the Bajaj Hindusthan Fund Diversion Allegations

Bajaj Hindusthan Sugar Limited is one of India's largest sugar manufacturers, listed on both the BSE and NSE. SEBI initiated an investigation into the company after receiving information about the alleged diversion of funds to related entities, specifically through Ojas Industries and Bajaj Power Generation. The investigation examined whether company funds were channelled to these entities in transactions that were not disclosed to the stock exchanges as related party transactions. Under the LODR Regulations, listed companies are required to identify and disclose all material related party transactions, obtain audit committee approval, and in certain cases, seek shareholder approval. Non-disclosure of RPTs is a serious regulatory violation, as it deprives investors of information material to their investment decisions.

SEBI's Jurisdiction: Why the Regulator Can Investigate Fund Diversion

The company and its promoters raised a preliminary objection contesting SEBI's jurisdiction to investigate the alleged fund diversion. They argued that the matter was essentially a corporate governance or company law issue that should be handled by other authorities. SEBI rejected this argument, holding that it has the statutory mandate under the SEBI Act, 1992, to investigate any matter that affects investor interests or market integrity. Section 11 of the SEBI Act empowers the regulator to take measures to protect the interests of investors in securities and to promote the development and regulation of the securities market. SEBI also pointed to its authority under the LODR Regulations, which require listed companies to comply with disclosure obligations, including those related to RPTs. The failure to disclose material transactions is a violation of listing obligations that falls directly within SEBI's regulatory domain.

LODR Regulations on Related Party Transaction Disclosure

Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, governs the framework for related party transactions by listed companies. A related party transaction is defined as a transfer of resources, services, or obligations between a listed entity and a related party, regardless of whether a price is charged. All material RPTs require prior approval of the audit committee, and transactions exceeding prescribed thresholds require approval of shareholders through a resolution in which interested directors and related parties cannot vote. Listed companies are also required to disclose RPTs in their annual reports and periodic filings with the stock exchanges. The SEBI LODR framework was strengthened in 2022 to broaden the definition of related parties, expand the scope of transactions requiring approval, and enhance disclosure requirements. Non-compliance can attract penalties, directions for disgorgement of gains, and debarment of individuals from the securities market.

Key Takeaways for Listed Companies and Investors

SEBI has confirmed that fund diversion investigations in listed companies fall within its jurisdiction under the SEBI Act and LODR Regulations. Companies cannot avoid SEBI scrutiny by characterising fund diversion as a company law matter. Related party transactions must be disclosed, approved by the audit committee, and if material, approved by shareholders. Non-disclosure of RPTs is a serious regulatory violation that can result in penalties, disgorgement, and debarment. The Bajaj Hindusthan case serves as a reminder that SEBI will assert its authority to investigate any conduct that affects investor interests, and that preliminary jurisdictional objections are unlikely to succeed when the matter involves disclosure obligations under listing regulations.