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Issues Notice To SEBI On Plea Seeking Probe Into Kitex Garments
The on Saturday issued notice to the on a writ petition filed by a shareholder, Muhammed Firdouz A V, seeking a direction to the market regulator to consider a detailed complaint alleging serious financial irregularities in the operations and disclosures of and its group entities. Justice Bechu Kurian Thomas, presiding over the single bench, ordered notice to SEBI and the respondent companies after the regulator’s counsel sought time for instructions. The matter has been posted for further consideration after two weeks.
The petition raises troubling questions about the accuracy and transparency of KGL’s financial reporting, particularly concerning its transactions with a US-based joint venture, , and with its sister concern, . The petitioner, who holds shares in KGL, contends that SEBI has failed to act on his complaint filed on , despite the gravity of the allegations. He now seeks a compelling the regulator to examine the matter and pass a within a time-bound period.
Shareholder’s Alarm Over Complex Financial Web
According to the petition, Firdouz’s concerns arose from a careful examination of publicly available annual reports, audited financial statements, statutory auditors’ reports, and related-party disclosures of KGL, KCL, and KUL. The central issue revolves around export transactions between KGL and KUL, which the petitioner claims aggregate to approximately ₹1,838.03 crore during the financial years 2016-17 to 2024-25. Such a substantial volume of cross-border sales to a joint venture in which KGL holds equal equity participation with KCL immediately raises questions about and the commercial rationale behind the dealings.
The petition further highlights that KGL carried significant trade receivables from KUL over multiple years. For instance, receivables stood at approximately ₹216.05 crore in FY 2019-20, ₹221.58 crore in FY 2021-22, and ₹122.77 crore in FY 2024-25. Alarmingly, KGL’s investment in KUL, amounting to roughly ₹27.76 crore, was written down in FY 2024-25 even while substantial receivables remained outstanding. The statutory auditors themselves recorded reservations concerning the recoverability of those receivables, a red flag that the petitioner argues demanded immediate regulatory scrutiny.
Unexplained Realisation and Commission Payments
A particularly striking aspect of the case is the subsequent realisation of approximately ₹94.86 crore from KUL during FY 2025-26, after years of mounting outstanding debts. The petitioner questions the circumstances surrounding this sudden payment, noting that KUL’s financial position appeared weak on paper. He seeks a thorough examination of the underlying transactions, fund flows, and banking records to determine the source of the funds and the genuineness of the payment. Such a pattern – prolonged non-payment followed by a large lump-sum recovery – often signals or , which could have serious implications for minority shareholders.
Equally concerning are the commission payments made by both KGL and KCL to KUL. The petition states that KCL made aggregate commission payments of approximately ₹46.98 crore to KUL between FY 2019-20 and FY 2024-25, while KGL separately paid about ₹44.36 crore in commission during the same period. The petitioner contends that these payments require examination of the underlying agreements, invoices, services allegedly rendered, computation of commission, and corresponding banking transactions. Without such scrutiny, there is a risk that these commissions may represent disguised profit shifting or improper related-party benefits.
Shifting Classification and GST Red Flags
Another issue raised in the petition concerns changes in the manner in which transactions between KCL and KGL were classified in financial disclosures. According to the petitioner, transactions that had previously appeared under heads such as rent, job work charges, expenses recovered, and revenue from services were, from FY 2021-22 onwards, substantially reflected under the consolidated head “Revenue from Sale of Goods”. This reclassification, the petitioner argues, warrants examination for consistency and transparency of related-party disclosures. Sudden changes in accounting treatment without clear explanation can obscure the true nature of inter-company dealings.
The petition also relies on a Draft Audit Report dated prepared by the . That report treated KUL as a related entity and referred to the applicability of the , with proposed proceedings under involving approximately ₹5.63 crore out of a stated total exposure of about ₹6.12 crore. The GST department’s findings lend weight to the petitioner’s contention that the transactions between the Indian entities and KUL may not have been conducted at arm’s length and could have tax implications.
SEBI’s Silence and the Need for Judicial Intervention
Firdouz submitted that he filed a detailed complaint against Kitex Group companies on before SEBI, meticulously detailing the financial statements, annual reports, and other documents. Despite the complaint being lodged, SEBI has not examined it and no reasoned decision has been communicated to the petitioner. The petition argues that “the continued failure of the 1st Respondent to consider the complaint assumes greater significance since the 2nd Respondent is a listed company having substantial public shareholding. Any material irregularity in the financial affairs or related party transactions of the 2nd Respondent would directly affect the interests of the public shareholders.”
The petitioner therefore seeks a directing SEBI to consider the complaint and pass a within a time-bound period. Additionally, he seeks a direction that SEBI, while considering the complaint, examine whether it should make any representation or objection before the in connection with the proposed scheme of arrangement between KCL and KGL, and to take appropriate steps before the scheme is sanctioned. This suggests that the alleged irregularities may be part of a broader restructuring effort that could prejudice shareholders if not properly investigated.
Court Proceedings and Next Steps
When the matter was taken up on Saturday, the counsel for SEBI sought time for instructions and took notice on behalf of the regulator. Notice was also issued to the other respondents – Kitex Garments Ltd and Kitex Childrenswear Ltd. The court has posted the matter after two weeks for further consideration. The issuance of notice indicates that the court has found sufficient merit in the petitioner’s grievances to warrant a response from the regulator and the companies.
Implications for Corporate Governance and Regulatory Oversight
This case underscores the critical role of SEBI in safeguarding investor interests, particularly in companies with complex related-party structures and cross-border operations. The allegations, if substantiated, could point to serious lapses in disclosure norms and potential financial manipulation. The ’s willingness to entertain the petition and issue notice reflects a growing judicial readiness to hold regulators accountable for inaction on shareholder complaints.
For legal professionals, the case serves as a reminder of the remedies available under when statutory bodies fail to discharge their duties. The petition’s reliance on publicly available financial data and auditors’ reservations highlights how diligent shareholders can use corporate filings to trigger regulatory scrutiny. The outcome of this case may also influence how SEBI handles complaints involving and cross-border joint ventures in the future.
As the matter awaits its next hearing, the legal community will be watching closely to see whether SEBI responds with a substantive examination of the complaint or seeks to defend its inaction. The ultimate decision could set a precedent for the timeliness and thoroughness of SEBI’s oversight of listed entities, especially those with significant foreign connections.
Conclusion
The ’s notice to SEBI marks a significant step in a shareholder’s quest for accountability. With allegations of dubious export sales, staggering receivables, unexplained recoveries, and shifting accounting classifications, the case raises fundamental questions about corporate governance and regulatory effectiveness. The next hearing in two weeks will likely determine whether the regulator will be compelled to investigate the Kitex Group’s financial dealings, potentially reshaping the landscape for minority shareholder protection in India.
