SEBI orders Setco Automotive promoters to repay over Rs 208 crore for alleged fund diversion; imposes market bans

SEBI orders Setco Automotive promoters to repay over Rs 208 crore for alleged fund diversion; imposes market bans

• SEBI orders Setco Automotive promoters to repay Rs 208 crore for fund diversion
• Promoters barred from securities market for up to two years; fines also imposed
• No penalties on Setco Automotive or its subsidiary due to financial stress

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SEBI orders Setco Automotive promoters to repay over Rs 208 crore for alleged fund diversion; imposes market bans

The Securities and Exchange Board of India (SEBI) has alleged that Setco Automotive Ltd (SAL) and its wholly owned subsidiary Setco Auto Systems Pvt Ltd (SASPL) diverted and misused company funds to benefit promoter-linked entities, and has ordered the promoters to repay over Rs 208 crore along with interest, while imposing market access bans on key individuals.

In an order passed in the Setco Automotive matter, SEBI’s Quasi-Judicial Authority, Santosh Shukla, held that funds raised at a high cost from India Resurgence Fund (IRF) were routed to promoter entities Setco Engineering Pvt Ltd (SEPL) and Transstadia Technologies Pvt Ltd (TTPL) under the guise of marketing commission, preference share investments and advances. The regulator found that these transactions were structured primarily to help promoters clear their personal borrowings and release pledged promoter assets, without adequate disclosure to public shareholders.

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SEBI order noted that SASPL paid a one-time marketing commission of Rs 107.76 crore to SEPL, despite the absence of commensurate services, while SAL and SASPL invested and advanced funds to promoter entities at negligible or low returns, even though the underlying borrowings carried an internal rate of return of about 23 percent. According to SEBI, this amounted to misuse of listed-company funds to support promoter interests.

The regulator concluded that the arrangement operated against the interest of minority shareholders, as key facts—particularly the bailout of promoter liabilities—were concealed. This, SEBI said, violated provisions of the SEBI Act and the PFUTP Regulations. However, SEBI clarified that the company’s published financial statements were not found to be untrue, and certain disclosure lapses were treated as technical or venial in nature.

Holding the promoters primarily responsible, SEBI directed managing director Harish Sheth and whole-time director Udit Harish Sheth to jointly and severally repay to SAL and SASPL the diverted amounts, including Rs 81.96 crore invested by SAL in SEPL, Rs 107.76 crore paid as marketing commission, Rs 13.07 crore invested by SASPL in preference shares, and Rs 5.98 crore advanced to TTPL, along with 23 percent annual interest from the dates of the transactions.

SEBI also barred Harish Sheth and Udit Sheth from accessing the securities market for two years. Executive director Urja Harshal Shah and former CEO Jatinder Bir Singh Gujral were barred from the market for one year each and penalised for aiding the misconduct. Independent directors and the chief financial officer were given the benefit of doubt and were only cautioned to exercise greater diligence.

Separately, SEBI imposed monetary penalties under the PFUTP Regulations. Harish Sheth was fined Rs 10 lakh under Section 15HA and Rs 1 lakh under Section 15HB, while Udit Harish Sheth, Urja Harshal Shah and Jatinder Bir Singh Gujral were each fined Rs 5 lakh under Section 15HA and Rs 1 lakh under Section 15HB.

Sections 15HA and 15HB of the SEBI Act, 1992 provide for monetary penalties for violations of securities laws. Section 15HA deals with fraudulent and unfair trade practices, prescribing a penalty of up to Rs 25 crore or three times the amount of profits made out of such practices, whichever is higher. Section 15HB serves as a residuary provision and applies to contraventions for which no specific penalty has been prescribed elsewhere under the Act, with penalties extending up to Rs 1 crore.

Notably, SEBI chose not to impose any monetary penalty or trading restrictions on SAL and SASPL themselves, citing the companies’ stressed financial condition and the risk that harsher action could further harm minority shareholders.

SEBI Quasi-Judicial Authority order was also critical about the process of investigation, the order recorded that, case involved voluminous records, including a show cause notice running into 40 pages along with 26 annexures comprising extensive documents and other material stored across three CDs. The record also includes replies and submissions filed by the Noticees, aggregating to about 1,500 pages, much of which consists of repetitive and largely unsubstantiated assertions.

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