SEBI named Mishtann Foods along with 23 individuals, including four of the company’s directors now banned from participating in the country’s capital market until further orders. The market regulator also restricted stock exchange BSE from clearing Mishtann Foods’ rights issue until further orders.
India’s capital markets regulator, SEBI (Securities and Exchange Board of India), has issued a sweeping ban on Mishtann Foods Ltd (MFL), its promoter Hiteshkumar Gaurishankar Patel, and four others, barring them from the securities market due to alleged financial irregularities and fraudulent activities. This comprehensive action highlights severe corporate governance lapses, misappropriation of funds, and misrepresentation of financial data.
What is Mishtann Foods?
Mishtann Foods Ltd., founded in 1981, is a publicly listed company that specializes in processing and manufacturing a wide range of agricultural products, including rice and wheat. The company entered the stock market in 2016. As of September 2024, its paid-up capital stood at ₹108 crore, and its market capitalization was valued at ₹1,338 crore as of December 2024. With over four decades in operation, Mishtann Foods has positioned itself as a significant player in the food processing sector, though it now faces scrutiny due to regulatory issues.
Overview of SEBI’s Action
On December 5, 2024, SEBI published a 53-page interim order detailing the restrictions on Mishtann Foods and its key executives. These include:
– Ban on Fundraising: MFL is prohibited from raising capital from the public until further notice.
– Market Access Restrictions: Twelve associated individuals, including promoter Hiteshkumar Patel, CFO Navinchandra Patel, former CFO Ravikumar Patel, and former director Jatinbhai Patel, are barred from accessing SEBI-regulated markets or associating with listed entities.
– Stock Exchange Directives: SEBI instructed the BSE to halt approvals for any rights issue by MFL.
This order came after investigations spanning April 2017 to March 2024 uncovered multiple violations, including fraudulent turnover, fictitious sales, and diversion of funds.
Allegations Against Mishtann Foods
A. Circular Turnover and Fake Transactions
SEBI’s investigation into Mishtann Foods Ltd (MFL) unveiled fictitious sales worth ₹47.10 crore between FY18 and FY24. These sales were part of a circular flow of funds between MFL and its related entities, creating an illusion of legitimate business activity. The investigation revealed a stark mismatch between declared revenues and assets, emphasizing deliberate financial misrepresentation. For example, while MFL reported a significant revenue increase through its Dubai-based subsidiary Grow and Grub Nutrients FZ LLC in FY24, standalone revenues for the same year dropped dramatically to ₹322 crore from ₹650 crore in FY23.
This discrepancy raised red flags about the authenticity of the company’s financial health. Circular transactions were engineered to inflate sales, mislead stakeholders, and maintain a facade of growth. Moreover, many buyers and suppliers listed in financial records were found to be non-existent during site inspections conducted by the BSE on SEBI’s directive.
B. Misappropriation of Rights Issue Proceeds
Rights issues played a pivotal role in the mismanagement of funds at MFL:
1. May 2023 Rights Issue:
MFL announced a ₹150 crore rights issue but later withdrew it.
2. April 2024 Rights Issue:
The company raised ₹49.9 crore in April 2024. SEBI discovered that the proceeds were not utilized for their stated purpose but were instead diverted to directors and group entities. Bank transactions revealed that funds were routed through multiple layers of entities, many of which were linked to the promoter and his associates.
3. August 2024 Rights Issue Draft:
MFL submitted a draft for a rights issue of less than ₹50 crore. This was a strategic move to bypass SEBI’s regulatory oversight, as issues below ₹50 crore do not require pre-approval. SEBI flagged this attempt as a deliberate evasion tactic aimed at continuing fund misappropriation.
SEBI’s interim order directed MFL to recover ₹49.82 crore misappropriated from the April 2024 rights issue and an additional ₹47.10 crore from fictitious sales transactions.
C. GST and Tax Evasion
The allegations against MFL also extended to tax fraud. In September 2022, SEBI received a complaint accusing MFL of GST evasion amounting to ₹78 crore. This prompted an investigation by the Central GST and Central Excise Department, which uncovered significant irregularities:
– Fake entities were created to facilitate fraudulent transactions.
– Many of these entities were registered in the names of relatives and family members of MFL’s managing director, Hiteshkumar Gaurishankar Patel.
– Site inspections revealed that most of these firms were either non-existent or non-operational at their listed addresses.
The GST department shared critical evidence with SEBI, including transaction records and details of these fictitious entities. The fraudulent practices not only violated tax laws but also distorted MFL’s financial statements, contributing to its inflated valuation.
D. Corporate Governance Failures
SEBI’s investigation into Mishtann Foods Ltd (MFL) revealed major lapses in corporate governance, reflecting systemic mismanagement. The company and its executives failed to cooperate by withholding crucial information, including audited financial statements, bank account details, and tax records, raising concerns about deliberate non-disclosure. From FY18 to FY24, MFL inflated revenues and understated expenses, presenting a false image of financial stability. Improper related-party transactions without approvals led to fund diversions, worsening governance breaches. These actions misled investors, causing share prices to fluctuate from ₹118.25 in October 2018 to ₹17.58 in March 2024, eroding trust.
Investigation and Enforcement
The Securities and Exchange Board of India (SEBI) launched a comprehensive investigation into Mishtann Foods Ltd. (MFL) following allegations of corporate misconduct, financial fraud, and governance lapses. The investigation uncovered widespread malpractices, leading to decisive enforcement actions.
To verify allegations, SEBI directed the Bombay Stock Exchange (BSE) to carry out unannounced inspections at MFL’s registered office, factory, and the premises of its listed buyers and suppliers. These site visits exposed alarming irregularities: many entities supposedly involved in transactions with MFL were either non-existent or not operational at their registered addresses. This revelation substantiated claims of fake sales, purchases, and circular fund flows.
Five Key Findings of the Investigation
Failure to Cooperate:
MFL and its key executives consistently failed to provide critical financial and operational data. SEBI’s repeated summonses for audited financial statements, tax filings, and bank account details went unanswered, obstructing the investigation.
Misleading Financial Statements:
Over FY18 to FY24, MFL consistently inflated its revenues and understated expenses. Notably, its FY24 consolidated financial statements included ₹967 crore from its Dubai-based subsidiary, Grow and Grub Nutrients FZ LLC. However, standalone revenues revealed a significant decline, raising questions about the legitimacy of its overseas transactions.
Improper Related-Party Transactions:
MFL engaged in significant transactions with its group entities without requisite approvals. These dealings lacked transparency and facilitated fund diversion, primarily benefiting directors and promoters.
Misappropriation of Funds:
Funds raised from the ₹49.9 crore rights issue in April 2024 were funneled to directors and related parties instead of being utilized for legitimate business purposes. Earlier, in May 2023, MFL had withdrawn a ₹150 crore rights issue, only to circumvent oversight by filing for a sub-₹50 crore rights issue in August 2024. SEBI uncovered these manipulations as deliberate attempts to bypass regulatory scrutiny.
Corporate Governance Failures:
Governance lapses were rampant, including non-compliance with listing obligations and misrepresentation of financial health. Investors were misled into believing in MFL’s false profitability, evidenced by its share price volatility. During the investigation period, the share price peaked at ₹118.25 in October 2018 before plunging to ₹17.58 by March 2024.
Promoter’s Role in Market Manipulation
Hiteshkumar Gaurishankar Patel, the promoter and managing director of Mishtann Foods Ltd. (MFL), was at the center of the company’s alleged fraudulent activities. His actions reveal a pattern of market manipulation and deliberate exploitation of regulatory gaps.
Declining Promoter Shareholding
Hiteshkumar’s shareholding in MFL steadily declined beginning March 2024. A significant portion of this reduction occurred between July and August 2024, when he sold shares worth ₹50 crore. This period coincided with a sharp rise in MFL’s public shareholder base, which surged from just 516 in FY18 to an astounding 4.23 lakh by Q2 2024. This remarkable increase in the number of retail investors reflected aggressive efforts to offload shares to the public, possibly using misleading financial statements to attract uninformed investors.
Share Price Manipulation
Hiteshkumar’s transactions aligned with volatile share price movements. During the investigation period, the stock price peaked at ₹118.25 in October 2018 before plummeting to ₹17.58 by March 2024. The artificially inflated prices misled investors into believing in the company’s financial health, allowing Hiteshkumar to profit significantly while retail investors bore the brunt of losses.
Use of Proceeds and Governance Failures
Further investigations revealed that rights issue proceeds, including ₹49.9 crore raised in April 2024, were diverted to directors and related parties instead of being utilized for business purposes. These funds, along with the promoter’s share sales, showcased an orchestrated attempt to siphon money away from the company.
Hiteshkumar’s central role in these activities underscores systemic governance failures at MFL, reflecting deliberate efforts to deceive regulators and exploit investors, thereby prompting SEBI’s stringent enforcement measures.
SEBI’s Directives and Remedies
SEBI’s directives to Mishtann Foods Ltd (MFL) and its promoters are aimed at addressing the financial mismanagement and fraudulent activities uncovered in the investigation. SEBI has instructed MFL to recover ₹49.82 crore misappropriated from the rights issue in April 2024 and ₹47.10 crore diverted through fictitious sales and transactions with group entities. Additionally, the regulator has mandated that the involved entities close any open derivative positions within seven days or by their respective expiry dates. Furthermore, SEBI issued show-cause notices to MFL, its promoters, and 23 other associated entities, demanding that they respond to the findings within 21 days. These actions are part of SEBI’s efforts to hold MFL accountable and protect investors from further financial harm.
Impact on Investors and Financial Statements
Mishtann Foods Ltd (MFL) significantly misled its investors through inflated sales and profits, resulting in severe financial losses for stakeholders. A stark discrepancy was evident in the company’s FY24 revenue figures. MFL reported a consolidated revenue of ₹967 crore from its Dubai-based subsidiary, Grow and Grub Nutrients FZ LLC, while its standalone revenue plummeted to ₹322 crore—a sharp decline from ₹650 crore in FY23. This misalignment raised red flags about the authenticity of its financial reporting.
The manipulation extended to MFL’s stock performance. The company’s share price soared from ₹27.30 in August 2018 to a peak of ₹118.25 in October 2018, fueled by misleading financial disclosures. However, the stock’s value sharply declined to ₹17.58 by March 2024, mirroring the unraveling of MFL’s overstated financial health. This volatility highlighted the adverse impact on retail investors, many of whom entered during the inflated price phase, only to face significant losses.
These financial misstatements, combined with dubious revenue practices, exemplify the systemic exploitation of investors, prompting stringent regulatory actions by SEBI to restore market integrity and prevent further harm to stakeholders.
