SEBI cracks down on multiple companies for misappropriation of funds for personal use

SEBI is reported to have initiated investigations against these companies for the alleged illegal diversion of funds by promoters to their relatives or front companies for personal use rather than the declared purpose for which the money was raised

Mumbai: The Securities and Exchange Board of India (SEBI) has cracked down on multiple companies for misappropriation of funds raised through rights issues in the stock markets, after receiving complaints from whistleblowers.

SEBI is reported to have initiated investigations against these companies for the alleged illegal diversion of funds by promoters to their relatives or front companies for personal use rather than the declared purpose for which the money was raised.

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The capital markets watchdog is currently looking into four or five such entities and has discerned a pattern in the misuse of such funds. The issue is, therefore, also being taken up on a broader level, according to a report.

Most of the cases relate to small and dormant companies which float a rights issue, in which shares are offered to existing shareholders at a discount to raise funds for further investment to expand the business. However, these funds are then diverted for personal use such as buying property.

Unlike pump and dump cases, fund diversion from rights issues does not have an immediate impact on the stock market. Hence, such misuse of funds is more difficult to detect and whistleblower complaints are the main source of information in unearthing the cases.

In an interim order passed on December 5, 2024, SEBI observed that Mishtann Foods Ltd. misused proceeds from its rights issue, transferring funds to promoters and group entities instead of their stated purpose. The company withdrew an initial Rs 150 crore rights issue and later issued smaller rights issues under Rs 50 crore, seemingly to avoid SEBI scrutiny.

The markets regulator has barred the company from raising public funds and prohibited the promoters from trading or accessing the capital markets.

Mishtann Foods was also asked to return Rs 49.82 crore misappropriated from its rights issue and Rs 47.10 crore diverted through fictitious transactions. To improve governance, SEBI has mandated the formation of a new audit committee to ensure strict compliance with regulations.

Additionally, BSE has been directed not to approve any further rights issues by the company. These directives will remain in force until further orders.

In another order passed on December 11, 2024, SEBI released an order against Debock Industries Ltd. The company was found to have engaged in financial misconduct, including manipulating its financial statements, submitting false bank statements, and siphoning off rights issue proceeds.

The company allegedly used fictitious preferential issues to migrate to the Main Board of the stock exchange. As a result, SEBI imposed strict restrictions, preventing the accused from dealing in securities or accessing the capital markets.