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Issues Notice To SEBI Over Alleged Financial Irregularities In Kitex Garments Transactions
The on Saturday issued notice to the on a filed by a shareholder seeking directions to the regulator to consider a detailed complaint alleging serious and questionable within the Kitex group of companies. Justice Bechu Kurian Thomas, presiding over the matter, directed SEBI to respond after its counsel sought time for instructions. The court also issued notice to and , both named as respondents in the case. The matter has been posted for further hearing after two weeks.
Petition Background and Allegations
The petitioner, Muhammed Firdouz A.V., a shareholder of Kitex Garments Ltd, filed the complaint before SEBI on , after purportedly examining publicly available annual reports, audited financial statements, , and related-party disclosures of the companies. The petition asserts that despite the detailed nature of the complaint, SEBI has neither examined it nor communicated any reasoned decision to the petitioner, thereby failing in its statutory duty to protect .
At the heart of the petition are between KGL and its US-based joint venture, . According to the petition, KGL disclosed export sales to KUL aggregating to approximately ₹1,838.03 crore during the period from FY 2016-17 to FY 2024-25. The petition further highlights substantial from KUL, including approximately ₹216.05 crore in FY 2019-20, ₹221.58 crore in FY 2021-22, and ₹122.77 crore in FY 2024-25.
The petitioner points out that KGL's investment in KUL, amounting to about ₹27.76 crore, was written down in FY 2024-25, even as the company continued to carry significant receivables from the same entity. The statutory auditors, in their observations, reportedly noted that they could not comment on the recoverability of these receivables because KUL's net worth had been fully eroded and no corroborative evidence was available to them. This raises serious questions about the prudence and accuracy of KGL's financial reporting.
Subsequent Payments and Commission Payments
In a development that the petitioner finds suspicious, the petition states that KUL subsequently paid approximately ₹94.86 crore towards the outstanding receivables during FY 2025-26. The petitioner has sought a detailed examination of the circumstances surrounding this payment, including the source of funds, underlying transactions, and corresponding banking records.
Equally concerning are commission payments made by both KGL and KCL to KUL. The petition alleges 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 during the same period. The petitioner contends that these payments warrant thorough scrutiny of the underlying agreements, invoices, services allegedly rendered, computation methodology, and corresponding banking transactions.
Reclassification of Disclosures Raises Red Flags
Another significant issue raised in the petition relates to the manner in which transactions between KCL and KGL were classified in financial disclosures. According to the petition, transactions that had previously been disclosed under specific heads such as rent, job work charges, expenses recovered, and revenue from services between FY 2015-16 and FY 2020-21 were, from FY 2021-22 onwards, substantially reflected under the consolidated head
"Revenue from Sale of Goods."
The petitioner argues that this change warrants examination for consistency and transparency of related-party disclosures, as it could obscure the true nature of inter-company dealings.
GST Draft Audit Report Suggests Potential Tax Exposure
The petition also relies on a Draft Audit Report dated , prepared by the Officer of the Deputy Commissioner, . According to the petition, the report treated KUL as a related entity and referred to the applicability of the . It proposed proceedings under involving approximately ₹5.63 crore under that head, out of a stated total exposure of approximately ₹6.12 crore. This external corroboration adds weight to the petitioner's concerns about the legitimacy of these .
Relief Sought and Court's Direction
The petitioner has sought a directing SEBI to consider the April 16 complaint and pass a reasoned order within a time-bound period. Additionally, the petition seeks a direction to SEBI to examine whether the regulator should make any representation or objection before the (NCLT) in connection with the proposed between KCL and KGL, and to take appropriate steps before such scheme is sanctioned.
In his petition, Firdouz argued:
"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
."
Legal Implications and Analysis
This case underscores a fundamental tension in securities regulation: the balance between SEBI's discretion in handling complaints and its statutory obligation to safeguard investor interests. By seeking a , the petitioner is effectively asking the court to compel SEBI to perform a duty—to consider and decide upon a complaint—rather than leaving it to the regulator's discretion to ignore or delay action. If the court ultimately directs SEBI to pass a reasoned order, it could set a significant precedent for how the regulator handles whistleblower complaints and shareholder grievances.
The involvement of adds an additional layer of complexity. Investigations into the flow of funds between Indian listed companies and their overseas joint ventures often involve coordination with foreign regulators and may require examination of tax and transfer pricing issues. The GST draft audit report referenced in the petition suggests that tax authorities have already flagged the possibility of tax evasion through .
The proposed between KCL and KGL further intensifies the stakes. If the alleged irregularities are proven, the NCLT may need to consider SEBI's objections before approving any amalgamation, reorganization, or restructuring. This could delay or derail corporate actions that shareholders may have approved, creating uncertainty in the market.
Impact on Corporate Governance and
This petition serves as a reminder to boards and audit committees of listed companies that scrutiny of is intensifying. Shareholders are increasingly using public documents to hold management accountable, and regulators are expected to respond promptly. SEBI's failure to act on a complaint that relies on audited financial data may be seen as a failure of oversight, especially when the complaint involves substantial sums—over ₹1,800 crore in export sales alone.
For , the outcome of this case could have direct financial implications. If the irregularities are substantiated, KGL may face penalties, restated financials, or even legal action. Conversely, if SEBI finds no merit, the company's reputation may still suffer from the mere pendency of such allegations. The court's intervention ensures that the matter will be examined, offering some interim protection to investor confidence.
Conclusion
The 's decision to issue notice to SEBI marks an important step towards accountability in corporate governance. By bringing the regulator to the table, the court has signaled that shareholder complaints cannot be ignored indefinitely. As the matter returns for further hearing in two weeks, the legal community will watch closely to see whether SEBI submits a response and what action it proposes to take. The case also highlights the growing role of the judiciary in ensuring that market regulators fulfill their mandate, particularly when public shareholder interests are at stake. For Kitex Garments and its group entities, the coming weeks could determine not only the outcome of this petition but also the future of their proposed restructuring plan before the NCLT.
