SEBI Probing Misuse Of Rights Issue Funds By Several Entities — Exclusive
While SEBI is currently looking into four to five such entities, it is also observing a pattern in such misuse of funds.
The Securities and Exchange Board of India is investigating several companies for misappropriating proceeds raised from rights issues after seeing a rise in such cases for the past year, people in the know told NDTV Profit.
While the regulator is currently looking into four to five such entities, it is also observing a pattern in such misuse of funds and is trying to deal with the broader issue, they said.
Capital raised through the rights issue is siphoned off to promoters, their relatives or other entities in an unregulated manner, the people said.
Unlike pump and dump cases, fund diversion from rights issue does not have an immediate stock impact. Hence, such misuse of funds becomes more difficult to detect. The regulator relies heavily on investor complaints and whistleblower information to identify these cases, they said.
This is a phenomenon seen in small and dormant companies usually, one of the persons quoted above said on the condition of anonymity.
A rights issue is when a company offers its existing shareholders the chance to buy more shares at a discount. It helps the company raise money without taking a loan.
Previous Cases
In an interim order passed on Dec. 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.
Since then, the regulator has barred the firm from raising public funds and prohibited key individuals from trading or accessing the capital markets. Several officials are also restricted from associating with SEBI-registered intermediaries or public companies.
MFL 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 and strict compliance with regulations.
Additionally, BSE has been directed not to approve any further rights issues by MFL. These directives will remain in force until further orders.
In another order passed on Dec. 11, 2024, SEBI released an order against Debock Industries Ltd.
SEBI found that the company 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 market.
Position Of Law
Since last year, the markets regulator has made it necessary to have a monitoring agency for all rights issue, irrespective of their size. The agency is supposed to look at the utilisation of the proceeds.
Previously, rights issues raising less that Rs 50 crore did not have to be in compliance of this requirement.
