The Securities and Exchange Board of India (SEBI) has taken strict action against multiple companies for misusing funds raised through rights issues in the stock market. This crackdown follows complaints from whistleblowers who alerted SEBI to the alleged illegal diversion of funds by company promoters.
Allegations of Fund Diversion
According to reports, SEBI has started investigations into four to five companies accused of diverting money raised from shareholders. Instead of using the funds for their declared purposes, promoters allegedly funneled the money to their relatives, front companies, or for personal gains, such as purchasing properties.
SEBI has noted a recurring pattern in these cases, prompting the regulator to address the issue at a broader level. Many of the accused companies are small or inactive entities that raised funds through rights issues. In a rights issue, existing shareholders are offered discounted shares to help the company expand its business. However, in these cases, the money was allegedly misused.
Challenges in Detection
Unlike “pump and dump” scams that quickly affect stock prices, the misuse of rights issue funds is harder to detect. This is because it does not have an immediate impact on share prices. SEBI has largely relied on whistleblower complaints to uncover these fraudulent practices.
Mishtann Foods Ltd. Case
In an interim order issued on December 5, 2024, SEBI found that Mishtann Foods Ltd. had misused the proceeds from its rights issue. Instead of investing the money as promised, the company transferred funds to its promoters and related entities. Mishtann Foods had initially planned to raise Rs 150 crore but later reduced the amount to under Rs 50 crore, reportedly to evade SEBI’s scrutiny.
As a result, SEBI barred Mishtann Foods from raising more public funds and prohibited its promoters from trading or accessing the capital markets. The company was also ordered to return Rs 49.82 crore, which had been misappropriated, and Rs 47.10 crore that had been diverted through fake transactions.
To improve governance, SEBI instructed the company to form a new audit committee to strengthen oversight and ensure compliance with regulations. Additionally, the Bombay Stock Exchange (BSE) has been directed not to approve any further rights issues by Mishtann Foods until further notice.
Debock Industries Ltd. Case
In another order passed on December 11, 2024, SEBI took action against Debock Industries Ltd. for financial misconduct. The company was found guilty of manipulating its financial statements, submitting false bank records, and misusing funds raised through rights issues.
Debock Industries allegedly used fake preferential issues to qualify for listing on the Main Board of the stock exchange. Following these findings, SEBI imposed strict restrictions, barring the company and its promoters from dealing in securities or raising more capital from the markets.
Regulatory Vigilance
SEBI’s recent actions demonstrate its increased vigilance against financial misconduct in the stock markets. By targeting companies that misuse shareholder funds, SEBI aims to protect investors and ensure greater transparency and accountability in the financial system.
The regulator has emphasized that stricter monitoring and improved corporate governance practices are essential to prevent such fraudulent activities in the future. SEBI’s investigation is ongoing, and further actions may be taken as more details emerge.
