The Securities and Exchange Board of India (SEBI) has taken stern action against Mishtann Foods Ltd (MFL) and its key executives for alleged financial mismanagement, fraudulent transactions, and corporate governance violations.
In its interim order, SEBI barred five entities, including MFL and its promoter Hiteshkumar Gaurishankar Patel, from participating in the securities market until further notice.
This move is part of SEBI’s commitment to protect retail investors and uphold transparency in the capital markets.
Key Allegations Against Mishtann Foods
1. Misuse of Funds
- Fictitious Transactions: MFL allegedly engaged in circular transactions with group entities, resulting in fund misappropriation of ₹47.10 crore.
- Rights Issue Proceeds Misappropriation: Proceeds from a ₹49.9 crore rights issue in April 2024 were diverted to partners and directors of group entities.
2. Misleading Financial Reporting
- Financial statements from FY18 to FY24 were found to contain untrue and misleading information. SEBI stated that this resulted from the failure of MFL’s directors to fulfill their obligations under the Listing Obligations and Disclosure Requirements (LODR) rules.
3. Promoter Actions
- Share Offloading: Hiteshkumar Patel offloaded shares worth ₹50 crore in July-August 2024. His promoter holding has been in continuous decline since March 2024.
- Rapid Increase in Shareholders: The number of public shareholders surged from 516 in FY18 to 4.23 lakh by Q3 2024, raising suspicions of manipulation.
4. Circumventing SEBI Oversight
- MFL withdrew a ₹150 crore rights issue in May 2023 and instead issued multiple smaller rights offerings, each below ₹50 crore, to avoid stricter compliance under the ICDR (Issue of Capital and Disclosure Requirements) rules.
SEBI’s Directives
- Market Ban:
- MFL, its promoter Hiteshkumar Patel, and key executives are barred from raising money from the public or associating with any SEBI-registered entity until further orders.
- Repayment Orders:
- MFL must return ₹49.82 crore of misappropriated rights issue proceeds and ₹47.10 crore diverted through fictitious transactions to group entities.
- BSE Restrictions:
- The Bombay Stock Exchange (BSE) has been directed not to approve any new rights issue applications filed by MFL.
- Show Cause Notice:
- SEBI issued show-cause notices to 24 entities, requiring them to file replies or objections within 21 days.
Insights Into SEBI’s Investigation
The investigation, covering the period from April 2017 to March 2024, was prompted by complaints of GST fraud and other irregularities. SEBI found that:
- MFL’s negative cash flow and negligible fixed assets were inconsistent with its high sales figures.
- Proceeds were systematically funneled to promoters and group entities, suggesting deliberate financial engineering.
Implications for Retail Investors
The fraudulent activities of MFL highlight significant risks for retail investors, who accounted for a sharp increase in the company’s shareholder base.
SEBI’s action is a timely reminder of the importance of due diligence when investing, especially in companies with questionable track records.
Broader Message From SEBI
SEBI’s crackdown sends a clear message about its zero-tolerance policy for financial mismanagement and governance lapses:
- It underscores the need for strict compliance with disclosure norms.
- The market regulator is reinforcing its role in protecting the interests of retail investors from corporate misconduct.
Conclusion: Safeguarding Market Integrity
This decisive action by SEBI against Mishtann Foods and its associates highlights the regulator’s commitment to maintaining trust and transparency in India’s capital markets.
As investigations continue, it remains critical for investors to stay informed and cautious about companies with a history of financial irregularities.
The outcome of SEBI’s inquiry will likely set a precedent for handling similar cases in the future, ensuring accountability and deterring misconduct in the securities market.
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Important links. Mishtann Foods