SEBI’s Brightcom order: Many firsts in a complex area that needs many more orders for conclusive jurisprudence

SEBI will have to deal with the issues of accounting, and that too of tech companies, which will become precedents for future cases.

The recent interim order of SEBI against Brightcom Group Limited (BGL) and certain of its promoters/directors has been already reported widely on certain broad aspects on the alleged accounting irregularities of large proportions (e.g., see here, here and here). However, the order also deals with a few interesting but very complex subjects where the SEBI order is a first, at least on the scale of amounts involved.

One of these relates to SEBI examining application of Indian Accounting Standards (IndAS) in great detail. Such level of detailed accounting related scrutiny by SEBI of IndAS has not been seen before. More interestingly, this examination is in relation to a new-age sophisticated digital tech company, an industry having its own complexities and uncertainties.

While SEBI has attempted to portray the issue in black and white and draw clear lines, the question is whether these issues are as clear and precise as SEBI has made them to be? Moreover, has SEBI used the benefit of hindsight and used the advantage of developments occurring later to judge on decisions taken by management earlier when the matters were uncertain?

To be clear, there have been several other disturbing allegations that SEBI has made and thus, perhaps in context, SEBI’s concerns regarding accounting get strengthened. This can be seen if one could summarise broadly what SEBI’s case is.

But before that, it is to be noted that the SEBI order (Order) is an interim order. This means that it is subject to further investigation by SEBI itself, which may lead to the case taking new turns. Secondly, the Order doubles up as a Show Cause Notice, meaning that all the assertions of SEBI are allegations, which BGL and other noticees have an opportunity to reply on and present their case.

Finally, even if the allegations are confirmed by SEBI in a final order, it may be further contested in appeal. But even with all this, the issues can be studied academically on certain developing areas that have significant future implications.

Four Issues At Stake

Essentially, SEBI has alleged that BGL has committed significant accounting irregularities. Firstly, it has delayed the accounting of impairment losses of a huge amount of nearly Rs 1,000 crore. This means that losses of earlier years were not accounted for in those years but much later.

Secondly, the accounting presentation, SEBI said, of such impairment losses was done incorrectly. To put this a little simplistically, for ease of understanding, the impairment losses, instead of being accounted above the line, were accounted below the line: i.e, in what IndAS refer to as Other Comprehensive Income (OCI). This could lead to misrepresentation of what the profits from operations for that year were.

Thirdly, and this is where matters become more technical, SEBI has alleged that there was capitalisation of what was essentially expenses. Research expenses are, SEBI said, to be treated as expenses and not assets. If expenses are wrongly treated as assets, the profit is shown wrongly higher. Indeed, even the assets are wrongly shown higher.

Fourthly, there was the issue that the alleged impairment occurred in the subsidiaries. BGL was the holding company which had in its books not these assets but investments in the subsidiaries. Whether and when the holding company BGL should have impaired and thus provided for the loss in the investments in the subsidiaries was the final major bone of contention.

When Asset Reduces In Value

The concerns regarding impairment had a significant connection with changes to privacy rules in Europe (General Data Protection Regulation or GDPR) - which clamped down on collecting/analysis of private data. This was, SEBI said, a material development for BGL and its businesses. It could lead to many products/services of BGL becoming unusable (and hence a dead loss or, to use the accounting term, impaired) or requiring significant modifications to keep up with the new law.

SEBI alleged that not only BGL should have informed the exchanges of this material development much earlier, but should have also accounted for the impairment losses too much earlier.

These issues are noteworthy because SEBI has, perhaps for the first time at this scale, treaded the waters of the relatively new accounting rules – the IndAS. The IndAS are not merely recent. There are several areas where business judgment and even discretion is involved. For example, when can asset be said to have reduced in value, requiring write off or impairment?

Timing Matters, Subjectivity Too

Though there are certain guidelines to determine whether impairment has taken place or not, the matter still also requires peeking into the future with the eyes of a businessperson. This not only brings business judgment in the picture, but a level of uncertainty and even subjectivity. The same facts could be viewed differently by a different set of persons. Worse, if the same matter is viewed much later when many uncertainties are resolved, the answer may change.

However, the question is whether a person, having a different business judgment or having a different view on the uncertainty or having the benefit of knowledge of these later developments and thus hindsight wisdom, pronounce whether the earlier decision was bonafide, wrong or even fraudulent? Thus, the present case is a good example where not only these new accounting principles have been examined, but even interpreted by SEBI. It thus initiates the debate on this and the beginning of an enriching discussion on IndAS and even the law on this aspect.

The fact that these accounting principles were in the context of a cutting edge infotech company, where even the management is dealing with very fast changes, makes it more interesting. In this case, BGL has effectively said that, at that particular point, it was confident that the new privacy laws could be duly dealt with in their products/services through modifications, where required.

Here again, then, the question is if this judgment is proved wrong later, can it be said to be not bonafide or even fraudulent? This again is a subject where there will be more and enriching debates.

Why This Case Is Important

Having said that, the context of the foregoing is also important to understand why SEBI took a serious view. SEBI alleged, firstly, that BGL did not provide, and also delayed the provision of, required information, even in relation to accounting information. Then there was the very serious allegation that the promoters offloaded shares in the market before accounting for the huge impairment losses.

Even worse, SEBI alleged that the promoters did not disclose such offloading in their regular reports which gave a wrong picture to the public. The Promoters replied that much of these was not offloading but pledge of shares. Viewed in this context of SEBI’s charge was that shares were being offloaded at the then higher ruling price when the losses were not provided for, the charges relating to accounting irregularities get a different context. SEBI has thus ascribed a motive for the alleged accounting irregularities.

In securities laws, for proving fraud, price manipulation and the like, for civil matters, the benchmark is lower. It is of showing preponderance of probability, or to show that it is more likely there were such wrongs than not. This is as compared to criminal proceedings where the requirement is of proof beyond reasonable doubt. Thus, the context of these other factors may help SEBI in its case and it would have to be seen whether the replies of the company cross this benchmark in its favour.

Nonetheless, even if the other allegations relating to offloading of shares without due disclosure etc. are proved, SEBI – and very likely appellate courts – will have to deal with the issues of accounting, and that too of tech companies, which will become precedents for future cases. This, as much as for other reasons, makes future developments in this case something to look forward to.

Jayant Thakur is a chartered accountant. Views are personal and do not represent the stand of this publication.