SAT Quashes SEBI Order Directing Prabhat Dairy To Deposit Rs1,292 Crore; Asks for a Deposit of Rs500 Crore

SAT Quashes SEBI Order Directing Prabhat Dairy To Deposit Rs1,292 Crore; Asks for a Deposit of Rs500 Crore Last week, the Securities Appellate Tribunal (SAT) quashed an order issued by Securities and Exchange Board of India (SEBI) directing Prabhat Dairy to deposit over Rs1,2920000000. SEBI has also been asked to process the delisting application of Prabhat Dairy and pass appropriate orders within six weeks. The SAT order states "The direction of the WTM to deposit a sum of Rs1,292.460000000 is wholly arbitrary and has been passed without any application of mind". WTM is a whole-time member of SEBI, in this case Prabhat Dairy Limited In an ex-parte order on 20th October, SEBI had directed Prabhat Dairy to deposit Rs12920000000 proceeds from the sale of its key business in an escrow account of a nationalised bank pending a forensic audit. It had also hauled up the company’s management for not cooperating with the forensic auditor Grant Thornton. The SEBI interim order came after reports which accused the company of misuse and wrongful diversion of funds raised through the sale of its core dairy business for Rs1,7000000000 to French multinational Groupe Lactalis in April 2019. Earlier in July, SEBI had appointed Grant Thornton LLP as forensic auditor to check facts and the financials of the firm and the financial statements for the financial years FY18-19 and FY19-20. In January 2019, Prabhat Dairy said that its board has approved the sale of the firm's shareholding in its wholly-owned subsidiary Sunfresh Agro Industries Private Limited to Tirumala Milk Products Private Limited for a total consideration of almost Rs1,2270000000. It also approved the sale and transfer of its dairy product business for about Rs4730000000. The company shared its intention to distribute the net proceeds of the sale transactions (around Rs1,2000000000) with shareholders and even set up a committee to advise on this. Subsequently in September 2019, Prabhat Dairy stated that promoters intend to acquire 49.9% stake (currently being held by public shareholders) and delist the company from the Exchanges. Prabhat Dairy appealed to the SAT after the market regulator’s interim order to deposit the money. Prabhat argued that the amount left to be distributed after meeting tax liabilities, indemnity, transaction cost, debt outstanding was about Rs854.400000000. Of this, 50% (Rs4270000000) will go to the promoters and roughly Rs4270000000 would go to minority shareholders comprising 49.9%. SAT said SEBI’s order “would cripple the company and bring it to down to its knees which is neither in the interest of the company nor in the interest of its shareholders.” The tribunal added that the SEBI order was “not just as there was no specific finding on diversion of funds.” Instead, SAT asked Prabhat Dairy to deposit Rs5000000000 in an escrow account within 10 days. Simultaneously the firm has been directed to share all the required information with the forensic auditor Grant Thornton. The forensic auditor will have to submit its findings within one month. The counsel for SEBI submitted that the directions SEBI had passed were “solely to protect the interest of the shareholders of the company.” He added the company had indicated that it would distribute substantial portion of the sale proceeds to shareholders but was yet to do so. The firm had even failed to declare its March quarter results before the stipulated time which led to the inference that there was something fishy. The counsel also said that it needs to be noted that the distribution of the sale consideration to shareholders should not be mixed with the consideration of payment to be made under the delisting application. The sale proceeds have to be distributed by the company, while the promoter is required to pay separately for delisting.