Sebi Clamps Down On Funds Diversion In Cos

Mumbai: 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.

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 in NDTV Profit. 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 Rs150 crore rights issue and later issued smaller rights issues under Rs50 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.