The Securities and Exchange Board of India (SEBI) has stepped up its drive against a number of firms alleged to have diverted funds raised from rights issues in the stock market.
This move comes in response to complaints by whistleblowers that company promoters are illegally diverting funds to their relatives or front companies, instead of deploying the money for the stated purposes, including business growth.
SEBI is said to be probing four or five such companies and has found a pattern of misuse of funds. The issue is therefore being dealt with on a larger level, media reports say.
Normally, small and inactive companies float rights issues, issuing shares at a discount to existing shareholders to raise funds for business expansion. But in such instances, the money raised is siphoned off for personal use, like buying property, rather than being ploughed back into the company. Unlike in the usual "pump and dump" scams, where prices are artificially pumped up before selling the shares, diversion of funds from rights issues does not have an immediate effect on the market, making it more difficult to identify. Whistleblower complaints have therefore become an important source of information in detecting such abuse.
In a major turn of events, SEBI issued an interim order on December 5, 2024, relating to Mishtann Foods Ltd.'s misappropriation of funds raised by its rights issue. The firm remitted money to promoters and group companies for personal purposes, instead of investing the capital for the declared business expansion. SEBI discovered that Mishtann Foods had withdrawn a first Rs 150 crore rights issue and subsequently issued smaller rights issues of less than Rs 50 crore, apparently to avoid detection. Consequently, the regulator suspended the company from tapping public funds, banned the promoters from trading and dealing in the capital markets, and ordered the company to repay Rs 49.82 crore of money swindled during the rights issue, as well as another Rs 47.10 crore channelled through dummy deals. Also, SEBI ordered the setting up of an additional audit committee to ensure stronger governance and a strict compliance framework. Further, the Bombay Stock Exchange (BSE) was directed not to sanction any additional rights issues by the company until further notice.
On 11th December 2024, SEBI also directed an order against Debock Industries Ltd., which was guilty of financial impropriety in the form of tampering with financial statements, filing false bank statements, and misusing rights issue proceeds. The company has allegedly employed fraudulent preferential issues to shift to the Main Board of the stock exchange. Accordingly, SEBI has imposed drastic curbs, prohibiting the company from dealing in securities or access to the capital markets.
The step shows SEBI's determination in protecting investors as well as providing assurance that moneys received through rights issue are utilized appropriately.
Read also| India ranks among top textile exporters with 4 pc global share, Says Minister
Read also| India to Contribute 6% to Global Trade Growth and Secure 3rd Position by 2029: Report
