SEBI Takes Action Against Companies Misusing Funds

Mumbai, March 21 (NationPress) The Securities and Exchange Board of India (SEBI) has taken decisive action against several firms for the misappropriation of funds raised through rights issues in the stock market, following reports from whistleblowers.

SEBI has commenced investigations into these companies for the alleged unlawful diversion of funds by promoters to their relatives or front companies for personal gain instead of the intended purpose for which the funds were raised.

The capital markets regulator is currently examining four or five such entities and has identified a trend in the misuse of these funds. As a result, the issue is also being addressed on a larger scale, as reported by NDTV Profit.

Many of these cases involve small and inactive companies that initiate a rights issue, offering shares to existing shareholders at a discount to generate funds for business expansion. However, these funds are often redirected for personal expenditures, such as purchasing property.

Unlike pump-and-dump schemes, the diversion of funds from rights issues does not have an immediate effect on the stock market, making such misuse more challenging to detect. Whistleblower complaints are the primary source of information in uncovering these cases.

In an interim order issued on December 5, 2024, SEBI found that Mishtann Foods Ltd. misused the proceeds from its rights issue, transferring funds to promoters and related entities instead of their declared purpose. The company initially withdrew a Rs 150 crore rights issue and subsequently issued smaller rights issues of under Rs 50 crore, seemingly to evade SEBI scrutiny.

As a result, the markets regulator has prohibited the company from raising public funds and has barred the promoters from trading or accessing the capital markets.

Mishtann Foods has been directed to return Rs 49.82 crore misappropriated from its rights issue and Rs 47.10 crore diverted through fictitious transactions. To enhance governance, SEBI has mandated the establishment of a new audit committee to ensure strict adherence to regulations.

Furthermore, the BSE has been instructed not to approve any further rights issues by the company. These measures will remain in effect until additional orders are issued.

In another order issued on December 11, 2024, SEBI took action against Debock Industries Ltd., which was found to have engaged in financial misconduct, including manipulation of its financial statements, submission of false bank statements, and misappropriation of rights issue proceeds.

The company allegedly utilized fictitious preferential issues to transition to the Main Board of the stock exchange. Consequently, SEBI imposed stringent restrictions, preventing the involved parties from trading in securities or accessing capital markets.