The Dissenting Opinion in Bombay Dyeing Case: Rethinking Fraud and Corporate Control under Securities law

CCL NLUO
15 hours ago
7 min read

Fourth year law student at Gujarat National Law University, Gandhinagar

I. Introduction

On 16.01.2026, the Securities Appellate Tribunal (“SAT”), in Bombay Dyeing & Manufacturing Company Ltd. v. SEBI, passed an order reversing an earlier order of the Securities and Exchange Board of India (“SEBI”) against the Bombay Dyeing & Manufacturing Company Limited (“BDMCL”), SCAL Services Limited (“SCAL”) for committing fraud under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). A separate dissenting opinion was delivered by Justice P. S. Dinesh Kumar, who upheld SEBI’s order and adopted a substance-over-form approach in establishing securities fraud under the PFUTP Regulations.

The matter presently lies for final adjudication before the Supreme Court, which by an order dated 16.07.26, directed that the SAT’s Order shall not operate as a precedent in similar cases before the Tribunal pending adjudication of the appeal.

II. Factual Background

In this dispute, BDMCL, a listed company of the Wadia group, entered into 11 Memoranda of Understanding (“MoUs”) with SCAL for the sale of residential units in Mumbai, wherein SCAL was expected to act as an independent party and later sell these flats to the ultimate buyers. SEBI questioned the validity of these transactions between BDMCL and SCAL due to the associate-like relationship between these companies. It was contended by SEBI that SCAL lacked the independent financial capacity to undertake these transactions and BDMCL exercised significant control over SCAL even though BDMCL’s shareholding was strategically reduced from 49% to 19% to escape the formal legal thresholds of the Companies Act and the associated consolidation requirements. The financial statements of BDMCL reported revenue of approximately ₹2,492.94 crore and a profit before tax of ₹1,302.02 crore by relying substantially on these MOUs with SCAL; but the actual amount received was only ₹186 crore.

Due to the considerable difference in these amounts, SEBI ordered that these transactions amounted to fraud under the PFUTP Regulations which was later reversed in an appeal before the SAT by 2:1 majority.

This article analyses the SAT order through three key legal issues raised during these proceedings: the standard required for proving fraud in securities law, the assessment of corporate structures and their inter-group relationships, and the lifting of corporate veil in securities fraud. These questions hold greater significance in an era of increasingly sophisticated corporate structures, wherein statutory classifications governing them may fail to reflect the true picture of intra-group relationships. The article further examines the approach taken by the dissenting judge and its role in broadening the scope of SEBI for addressing securities fraud and strengthening the enforcement of securities law in India.

III. The standard of proof required for establishing fraud under securities law

The central question in the Bombay Dyeing case concerns the standard of proof required to establish fraud under the PFUTP Regulations. While the majority relied on the absence of direct evidence demonstrating wrongful gain, deception or market manipulation to conclude that fraud had not been established, the dissenting opinion held that artificially inflated revenues being capable of influencing investors as sufficient evidence to establish fraud even in the absence of proof of harm.

The Supreme Court in SEBI v. Kanaiyalal Baldevbhai Patel, examined the definition of fraud under Regulation 2(c) of PFUTP Regulations, wherein it recognised that the definition is intentionally expansive and distinct from other traditional common law fraud provisions because securities fraud is jurisprudentially difficult to prove due to the constantly evolving corporate structures aimed at “evading statutory liabilities”. The Court relying on SEBI v. Kishore R. Ajmera stated that to prove fraud under securities law, the appropriate standard of proof is the civil test of preponderance of probabilities, wherein liability may be concluded based on inferences drawn from surrounding circumstances.

In N. Narayanan v. Adjudicating Officer, SEBI, the Supreme Court recognised the importance of ensuring accurate information in the securities market and held that artificially inflated financial disclosures distort market integrity, thereby impairing investor trust and amounting to securities fraud. These judicial precedents closely align with the dissenting opinion and indicate that the PFUTP Regulations are not merely punitive provisions applicable only after investor harm is crystallised; rather, they are purposive in nature and enable the regulator to take preventive actions to preserve market integrity and ensure investor protection, as recognised by the Supreme Court in SEBI v. Rakhi Trading Pvt. Ltd., by proactively curbing questionable conduct capable of causing harm.

IV. Assessing the intra-company relationships beyond the statutory thresholds

While examining the relationship between BDMCL and SCAL, the majority refused to consider the accounting standards and associated factors including board representation, participation in policy-making, material inter-company transactions, and interchange of managerial personnel that indicated BDMCL’s operational and economic influence over SCAL, and instead held that accounting standards cannot override statutory classifications. The majority exclusively relied upon section 2(6) of the Companies Act, 2013 to hold that since the shareholding of BDMCL in SCAL was below the threshold of 20%, SCAL was not an associate company or a related party.

On the contrary, the dissenting judge relied upon surrounding circumstances, including cross-holdings amongst Wadia Group entities, SCAL’s financial incapacity to enter into the transactions, and the continuing economic influence exercised by Bombay Dyeing group over its operations to establish SCAL to be an extended arm of BDMCL. The SAT’s order raises significant concerns by stating that the Companies Act is the sole determinant in examining intra-group relationships. This decision may enable entities to organise their shareholding in a manner that technically avoids the statutory classification of an associate company, but in substance allows them to continue exercising significant influence and operational control over the concerned entity.

In such a scenario, the concept of Ultimate Beneficial Ownership (“UBO”) and Senior Managing Official (“SMO”) becomes important for assessing intra-group relationships where formal shareholding thresholds may not fully capture the underlying economic reality. UBO goes further to identify the natural persons ultimately exercise beneficial ownership or significant influence, correspondingly the framework of SMO focuses on the individuals exercising senior managerial control when UBO cannot be conclusively identified.

The essential question in the present matter is not whether statutory provisions override accounting standards, but whether the assessment of intra-group relationships may extend beyond formal statutory classifications to encompass surrounding circumstances including cross-holdings and exclusive dealings among group entities, SCAL’s financial incapacity, common personnel, use of BDMCL’s premises and resources, and other considerations could be examined to ascertain the actual persons or entities exercising ultimate economic ownership or managerial control. In such contexts, the concept of UBO & SMO becomes particularly helpful for determination of the substantive nature of an intra-group relationship in securities law matters.

IV. The threshold for piercing corporate veil under securities law

The process of uncovering the true nature of the relationship between corporate entities is inextricably linked to “when should the corporate veil be lifted in cases of securities fraud?” The majority, relying on Balwant Rai V. Air India, held that the veil cannot be lifted unless SEBI satisfies the two-fold test of establishing, first, the existence of control and, secondly, the misuse of such control to conceal wrongdoing. The dissenting opinion broadened this test and held that the facts were "largely a writ on its face” and sufficient to indicate misuse of the corporate structure. It stated that SCAL, in practical terms, functioned as an instrumentality of the Wadia Group rather than as an independent market entity, thereby justifying the piercing of the corporate veil.

The majority’s requirement of proof of control and impropriety in a scenario where the allegation itself involves the use of corporate structures to create an appearance of independence, and avoid consolidation requirements, defeats the purpose of the doctrine of lifting the corporate veil. This is because the two-fold test can only be meaningfully satisfied after the regulator is permitted to apply this doctrine to examine the economic reality of the corporate arrangement, including the degree of control exercised among the entities.

The SAT order passed in Sahara V. SEBI , subsequently upheld by the Supreme Court, clarified that the principles governing the application of lifting of the corporate veil are not uniform across different branches of law and cannot be extended mechanically to securities regulation. The Tribunal emphasised that authorities such as Balwant Rai arose in different statutory contexts, and did not consider the distinct regulatory objectives of securities law. It further observed that SEBI in discharge of its statutory mandate to protect investors and preserve market integrity, must possess wide powers to identify who controls an entity by lifting the corporate veil whenever investor interests are affected or even “likely to be affected”. The Tribunal further cautioned that in the absence of such powers, SEBI would risk being reduced to a “mute spectator” to corporate misconduct concealed through these complex organisational structures.

This doctrine can be further strengthened with the concepts of UBO & SMO which provide a structured method for identifying the persons ultimately exercising control over an apparently independent entity. In the context of Bombay Dyeing case, applying these concepts could enable the regulator to establish the existence of economic and managerial control operating through layers of corporate structures. Once the requisite control has been established, the regulator can justify the piercing of the corporate veil to examine whether the corporate structure was misused to conceal wrongdoing.

IV. Conclusion

The dissenting opinion of SAT in Bombay Dyeing case provides a significant scope for widening of SEBI’s powers to deal with such complex scenarios with greater flexibility and adaptability. The questions raised in the appeal pending before Supreme Court go beyond the immediate factual matrix and raises broader issues concerning the scope and limitations of securities law in India. The competing opionions of the majority and dissenting judges sheds light on the existing legal ambiguities in the securities regulatory framework, where the dissenting opinion aims to offer a purposive approach for addressing the new emerging forms of corporate evasion, particularly those involving concealment of intra-group relationships for avoiding consolidation requirements during financial disclosures.

This article further demonstrates how concepts such as UBO and SMO could provide a useful framework for identifying individuals ultimately exercising control, thereby assisting the regulator in establishing the requisite control for the purpose of lifting the corporate veil and determining the liability for securities fraud after the requisite misuse has been established.

Given the wide statutory powers and the distinctive objectives entrusted to SEBI for the protection of investors and preservation of market integrity, these unresolved issues need to be clarified in light of the unique character of securities law and its distinction from other branches of law, thereby strengthening its enforcement and development in India.

Note: This article has been reviewed by Mr. Pratham Darad (Partner, IC RegFin Legal), at the Tier II Stage.