SEBI Bars Mishtann Foods MD Hiteshkumar Patel, Three Others From Securites Market For Alleged Fraud

The Securities and Exchange Board of India on Thursday imposed restrictions on five entities, including Mishtann Foods Ltd. and its promoter and CMD Hiteshkumar Gaurishankar Patel, barring them from participating in the securities markets until further notice.

The action follows allegations of financial mismanagement, fraudulent transactions, and corporate governance violations.

SEBI also prohibited MFL from raising funds from the public and barred 12 individuals, including Hiteshkumar Patel, CFO Navinchandra Patel, former CFO Ravikumar Patel, and former whole-time director Jatinbhai Patel, from associating with any SEBI-registered entity, listed company, or any firm aiming to raise public funds.

The regulator's investigation revealed that MFL had negligible fixed assets, negative cash flow from its operations, and unusually low inventory compared to its significant sales figures during the investigation period. These irregularities were found to be likely fictitious and involved circular flow of funds.

SEBI’s interim order also noted a dramatic increase in MFL's public shareholders, rising from just 516 at the end of fiscal 2018 to 4.23 lakh by the end of the September 2024 quarter.

Hiteshkumar Patel, the sole promoter of Mishtann Foods, sold shares of the company between July and August, raising around Rs 50 crore. His stake in the company has been steadily declining since the March 2024 quarter, suggesting he may be waiting for a more favorable time to offload his shares, potentially to the detriment of retail investors, the regulator said.

SEBI's investigation revealed that MFL was involved in booking fictitious sale and purchase transactions with group entities and misappropriating funds amounting to Rs 47.10 crore.

Ashwani Bhatia, SEBI's whole-time member, stated that Hiteshkumar, along with CFO Navinchandra Patel, former CFO Ravikumar Patel, and former whole-time director Jatinbhai Patel, failed to fulfill their duties, leading to the publication of misleading and false financial statements for MFL over seven consecutive fiscal years, from 2018 to 2024.

SEBI found these four directors to be in violation of the Listing Obligations and Disclosure Requirements (LODR) regulations and held them responsible for the 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.

(With inputs from PTI.)