New Delhi, Aug. 20 -- Hindustan Foods Ltd, a contract manufacturer for fast-moving consumer goods companies that counts three alternative investment funds as its shareholders, will have to pay a fine to stock exchange operator BSE Ltd for violating a rule even though it has already settled the matter with the capital markets regulator SEBI.

The matter goes back more than two-and-a-half years when BSE imposed a fine of Rs 52.21 lakh on Hindustan Foods in December 2023, a couple of months after the company paid Rs 24.32 lakh in October that year to settle the issue with the Securities and Exchange Board of India.

The company challenged the BSE's order before the Securities Appellate Tribunal. However, the tribunal dismissed the company's appeal in its ruling recently.

Backstory

Hindustan Foods was earlier part of Goa-based Dempo Group. In 2013, the Sameer Kothari-led Vanity Case Group bought a controlling stake in the company with Dempo retaining a small minority stake. The same year, the company began to actively trade on BSE. It listed its shares on the National Stock Exchange in June 2023.

In late 2016, Nikhil Vora-led venture capital firm Sixth Sense Ventures invested in the company. Three years later, private equity firms WestBridge Capital and Harsha Raghavan-led Convergent Finance joined the company's cap table. Convergent and Sixth Sense made follow-on investments in subsequent years. WestBridge sold its entire stake in 2024 while Convergent and Sixth Sense also trimmed their holdings.

Currently, Convergent owns a 1.42% stake in the company and Sixth Sense holds 1.51%. In addition, Vora's wife owns 2.06% while Raghavan holds 1.4%, stock-exchange data show. Another investor on its cap table is Clarus, the public markets fund of PE firm ChrysCapital, with a stake of 2.34% as of June-end.

The rule violation took place when WestBridge, Convergent and Sixth Sense collectively owned nearly a fifth of the company, according to shareholding data reviewed by VCCircle.

The violation

In its December 2023 order, BSE had said that Hindustan Foods didn't have the requisite number of independent directors on its board for four years, between 2018 and 2022. Previously, the contract manufacturer had filed an application with SEBI to settle this violation and paid a fine.

According to SEBI's regulations for listed companies, if a company's non-executive chairperson is also its promoter or is related to any promoter, then at least half of the board should consist of independent directors.

In Hindustan Foods' case, Dempo Group chairman Shrinivas V Dempo was appointed as a non-executive, non-independent director in 1999. He was later named as the chairman of Hindustan Foods' board. He is no longer the chairman but remains on the board as a non-executive director and is also listed as a promoter.

Apart from Dempo, the company's board currently includes managing director Sameer Kothari and executive director Ganesh T. Argekar. It also includes three independent directors, including chairman Shashi K Kalathil, and Sixth Sense's Vora, who is a non-executive director.

Company's arguments, SAT's reasoning

Hindustan Foods challenged BSE's order citing the principles of res judicata, which does not allow re-litigation of a matter that has already been settled by an adjudicating authority; and double jeopardy, which does not allow the prosecution a second time for the same offence.

However, the tribunal dismissed both arguments. It referred to Regulation 98 of the Listing Obligations and Disclosure Requirements (LODR) Regulations and the wording in SEBI's settlement order.

The tribunal said: "The above Regulation makes it clear that an entity in contravention of Regulations shall, 'in addition to the liability' under the securities laws, be liable for action by respective stock exchanges. That includes imposition of fines."

The tribunal also cited SEBI's October 2023 order, which said that the settlement was without prejudice to action, if any, that may be initiated by stock exchanges.

Published by HT Digital Content Services with permission from VC Circle.