The regulator also directed BSE to not approve any rights issue application filed by the firms.
Sebi on Thursday restrained five entities, including Mishtann Foods and its promoter and CMD Hiteshkumar Gaurishankar Patel, from the securities markets till further orders for alleged financial mismanagement, fraudulent transactions, and corporate governance lapses.
The regulator also barred Mishtann Foods Ltd (MFL) from raising money from the public as well as prohibited 12 entities, including Hiteshkumar, Navinchandra Patel (CFO), Ravikumar Patel (former CFO) and Jatinbhai Patel (former whole time director) from associating themselves with any Sebi-registered entity or, any listed company or any firm that intends to raise money from the public, until further orders.
Sebi found that MFL has negligible fixed assets on its books and negative cash flow from its operating activity and a very low inventory as compared to its sizeable sale figures during the investigation period and were prima facie found to be fictitious involving circular flow of funds.
Sebi in its interim order also observed the number of public shareholders of MFL has drastically increased from a mere 516 at the end of FY18 to 4.23 lakh by the end of September 2024 quarter.
Hiteshkumar, the sole promoter of MFL, offloaded shares of MFL during the July-August period, garnering around Rs 50 crore and the promoter holding has been declining since the March 2024 quarter.
Thus, it appears to be waiting for an opportune time to offload his shares to the detriment of the retail investors.
The regulator noted that Mishtann Foods was prima facie found by booking fictitious sale/purchase transactions with the group entities and misappropriated its funds amounting to Rs 47.10 crore.
Sebi's whole-time member Ashwani Bhatia said, Hiteshkumar, Navinchandra, Ravikumar, and Jatinbhai, failed to perform their duties and obligations which resulted in publication of untrue and misleading financial statements of MFL for seven consecutive fiscal years from FY18 to FY24.
Therefore, it was prima facie found that these four directors violated the provisions of regulations of LODR (Listing Obligations and Disclosure Requirements) rules.
These directors are also prima facie found responsible for violations committed by MFL.
Mishtann Foods had filed a draft letter of offer for a rights issue of around Rs 150 crore in May 2023, with Sebi, however, it was later withdrawn.
Later, the company came up with a rights issue worth Rs 49.9 crore in April 2024, and the issue proceeds were found to be misappropriated by transferring the issue proceeds to partners/ directors of its group entities.
In August this year, MFL filed a fresh draft letter of offer with the stock exchange for another rights issue of an amount of less than Rs 50 crore. As per norms, there is no requirement to file a draft letter of offer with Sebi for a rights issue of an amount less than Rs 50 crore.
Therefore, it is apparent from the modus operandi that MFL intended to circumvent the regulator's oversight and compliance with ICDR rules, by withdrawing the initial Rs 150 crore rights issue and then proceeding to raise money in multiple smaller tranches through rights issues of amounts less than Rs 50 crore.
Given, the track record of Mishtann Foods, there is every possibility that if in case the company is allowed to go ahead with the proposed rights issue, it may again divert its proceeds.
Accordingly, Sebi directed MFL to bring back the rights issue proceeds amounting to Rs 49.82 crore misutilised/ misappropriated through group entities and the amount of Rs 47.10 crore which was diverted to promoters/directors of MFL and their relatives through fictitious sales/purchases with group entities.
The regulator also directed BSE to not approve any rights issue application filed by MFL till further orders.
Further, Sebi also called upon to show cause to 24 entities, including MFL, its key officials and others as to why an inquiry should not be held against them and also directed them to file their reply/objections within 21 days.
The interim order came from a detailed investigation covering the period from April 2017 to March 2024, following complaints of GST fraud and other financial irregularities by Mishtann Foods.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)