CFID was created to raise the quality of corporate investigations. To fulfil that, it must move away from outcome-orientated investigations 

SEBI is statutorily mandated to protect the interests of investors. This mandate, however, is not one-dimensional. When SEBI investigates reputed listed companies—particularly those with long operating histories, diversified public shareholding, and significant market presence—it assumes an additional responsibility that is often understated: ensuring that its investigative and enforcement actions do not inflict disproportionate or avoidable harm on corporate reputation, management credibility or shareholder value, or create a prolonged seesaw of investor perception through the adjudication and appellate process.

Every SEBI order carries a signalling effect. Regulatory findings directly influence price discovery, investor confidence, credit relationships, and commercial counterparties. In cases involving large, widely held companies, a regulatory action may end up damaging the very shareholders SEBI is duty-bound to protect. 

SAT has recently set aside a SEBI order in yet another high-profile matter—Bombay Dyeing, a case likely to travel to the Supreme Court. It is against this backdrop that the functioning of the SEBI’s Corporate Finance Investigation Department (CFID) deserves closer scrutiny. The CFID was created a few years ago with a clear and well-intentioned objective. It was envisaged as a specialised investigative vertical to deal with complex corporate finance matters. The emphasis was meant to be on forensic depth, substance-over-form analysis, and technically sound investigations capable of withstanding judicial scrutiny. Implicit in the CFID’s creation was the recognition that investigations into listed companies are qualitatively different from market abuse or trading violation cases.

They demand multidisciplinary expertise—accounting, law, and sectoral knowledge—and, above all, an open-minded investigative approach that follows evidence wherever it leads, even if it contradicts the regulator’s initial hypothesis. Experience over the last few years, however, suggests that the CFID has often fallen short of this promise. A recurring criticism is poor case selection. Several investigations appear driven more by optics, personal conviction, or narrative appeal than by regulatory materiality. 

Closely linked to this is the tendency to adopt a preconceived narrative early in the investigation. Once an initial view is formed, subsequent investigative steps often appear directed at reinforcing that view rather than testing it. 

Another persistent weakness is insufficient engagement with business realities. Transactions are often examined in isolation, without adequate appreciation of commercial context, sector-specific practices, or the evolution of business decisions over time. Long-gestation projects, restructuring exercises, and complex funding arrangements are judged with the benefit of hindsight, ignoring the uncertainties and constraints that existed when decisions were taken. The result is that enforcement actions increasingly appear driven by internal conviction of wrongdoing rather than by the discipline of building evidence-based cases capable of surviving appellate scrutiny.

These institutional shortcomings are starkly illustrated by the Bombay Dyeing case. SEBI alleged that Bombay Dyeing and Manufacturing Company Ltd had improperly recognised revenue from bulk sales of real estate units to SCAL Services Ltd through multiple memoranda of understanding spanning several years. The regulator concluded that these transactions were not genuine, had inflated revenues and profits, and had misled investors.

Following a complaint received in 2019, SEBI conducted an investigation and issued a show cause notice in 2021, culminating in a detailed order in 2022, imposing monetary penalties, market access bans, and serious adverse findings against the company and its promoters. The order had immediate reputational and market consequences. When the matter reached SAT, however, the Tribunal delivered a rare split verdict. By a majority, SAT set aside SEBI’s order in its entirety, quashed the penalties, and directed refunds. The majority decision was notable not merely for its outcome but for its critique of the investigation.

SAT emphasised that suspicion, however strong, cannot substitute for evidence. It found that SEBI had failed to conclusively disprove the commercial reality of the transactions. Crucially, the investigation did not examine the transactions in their entirety. While the regulator questioned the initial sales to a connected entity, there was no meaningful inquiry into downstream sales, ultimate buyers, pricing, or receipt of consideration—factors central to determining whether the transactions were genuine.

For a case hinging on alleged sham transactions and improper revenue recognition, SEBI did not conduct a unit-wise examination of sales, buyers, payments, possession, and registration. Broad conclusions were drawn from selective data points, undermining the evidentiary foundation of the case. The inordinate delay of nearly nine years in initiating enforcement proceedings further weakened SEBI’s position. Equally significant was SAT’s observation that accounting standards involve judgement. The absence of any analysis of market impact or investor inducement further eroded the fraud narrative.

SAT also noted that much of the relevant information had been in the public domain through annual reports and exchange disclosures. SEBI’s decision to act only after complaints were received, nearly nine years later, highlighted the need for greater regulatory proactivity in identifying potential corporate misconduct through systematic analysis of filings.

The larger concern is institutional. The Bombay Dyeing episode is not an isolated instance but symptomatic of deeper issues within SEBI’s enforcement framework. While the Supreme Court may ultimately decide between SEBI and SAT in this case, there appears to be limited internal accountability when major enforcement actions are overturned. There is no visible mechanism for systematically incorporating appellate feedback into investigative practices. Without such feedback loops, errors are repeated rather than corrected. There is also a growing tendency within the regulatory ecosystem to equate aggressive enforcement with investor protection. This is a flawed premise. Investor confidence is damaged as much by reckless regulatory signalling as by corporate misconduct. 

True investor protection lies in careful case selection, forensic rigour, and proportionate action. 

The CFID was created to raise the quality of corporate investigations. To fulfil that mandate, it must move away from outcome-orientated investigations and towards evidence-driven, commercially informed enforcement. 

Deepak Sanchety