While barring Mishtann Foods Ltd (MFL) from raising funds for seven years, market regulator Securities and Exchange Board of India (SEBI) asked the company to retrieve nearly Rs100 crore allegedly misappropriated and diverted to group entities, promoters and directors.
In an order, Ashwani Bhatia, whole-time member (WTM) of SEBI observed that MFL filed a draft letter of offer for a rights issue amounting to about Rs150 crore in May 2023, but it was withdrawn by the company. "However, the company later came up with a rights issue amounting to Rs49.9 crore in April 2024 and the issue proceeds were found to be mis-utilised or misappropriated by transferring the issue proceeds to partners and directors of its group entities. Further, on 13 August 2024, MFL filed a fresh draft letter of offer with the stock exchange for another rights issue of less than Rs50 crore."
"Since there is no requirement of filing a draft letter of offer with SEBI for a rights issue of an amount less than Rs50 crore, it is apparent from the aforesaid modus operandi that MFL intended to circumvent SEBI's oversight and compliance with ICDR Regulations, by withdrawing the initial Rs150 crore rights issue and then proceeding to raise money in multiple smaller tranches through rights issues of amounts less than Rs50 crore. Given the track record of the company, there is every possibility that in case MFL is allowed to go ahead with the proposed rights issue, it may again divert its proceeds," the WTM says in the order.
In response to these findings, SEBI directed Mishtann Foods to recover the misused proceeds from the April 2024 rights issue, amounting to Rs49.82 crore and the Rs47.10 crore diverted to promoters and directors through fictitious transactions. SEBI also instructed the Bombay Stock Exchange (BSE) not to approve any rights issue applications from Mishtann Foods until further orders.
SEBI also directed Mishtann Foods to constitute a new audit committee and place a copy of its order and findings before the committee. "The new audit committee is directed to have enhanced oversight of related party transactions including approvals as applicable, financial reporting process and the disclosure of financial information to ensure that the financial statements are correct, sufficient and credible. Further, the new audit committee is directed to ensure that the company complies with the requirements of Listing Obligations and Disclosure Requirements (LODR) Regulations."
SEBI received a SCORES complaint on 16 September 2022 alleging circular or dummy turnover, goods and services tax (GST) fraud, stock and inventory manipulations, excessive booking of electricity expenses, income-tax fraud and bank fraud by MFL. The complainant also informed that Hiteshkumar Gaurishankar Patel, managing director (MD) of MFL was arrested by the GST department for GST fraud amounting to Rs78 crore.
SEBI also received a reference on 4 October 2022 from the office of the commissioner of central GST & central excise, Gandhinagar, informing that MFL was involved in large-scale manipulation of its books of accounts, revenue, income, and expenditure details by creating fake or paper entities in the form of buyers and suppliers.
The GST office also informed SEBI that searches conducted on the purported suppliers and buyers of MFL revealed that many of these supplier and buyer firms were in the names of relatives and family members of the MD of MFL and these firms were found to be non-existent or non-operational at their respective business addresses.
Five entities restrained by SEBI from markets include Mishtann Foods and its promoter and CMD Hiteshkumar Patel.
The regulator also barred Mishtann Foods from raising money from the public as prohibited 12 entities, including Hiteshkumar Patel, Navinchandra Patel, chief financial officer (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 order mentions the names of 24 entities. The 24 entities involved are: Mishtann Foods (noticee 1), Hiteshkumar Patel (noticee 2), Navinchandra Patel (noticee 3), Ravikumar Patel (noticee 4), Jatinbhai Patel (noticee 5), Bharatbhai Patel (noticee 6), Devalkumar Patel (noticee 7), Surendra Yadav (noticee 8), Kanakkumar Patel (noticee 9), Tejal Ravikumar Patel (noticee 10), Nikitaben Devalbhai Patel (noticee 11), and Manjulaben Gaurishankar Patel (noticee 12). Additionally, Rekhaben Kanakkumar Patel (noticee 13), Ajitkumar Narayanbhai Patel (noticee 14), Bhaveshkumar Vasantbhai Patel (noticee 15), Ravikumar Ramanbhai Patel (noticee 16), and Heemaben Janakkumar Patel (noticee 17) are also included.
The list further includes: Utpalbhai Dineshbhai Raval (noticee 18), Bhumi Jayantkumar Gor (noticee 19), Rajnish Pathak (noticee 20), Ashish Agarwal (noticee 21), Nurudin Jiruwala (noticee 22), Mikil Dineshbhai Vora (noticee 23), and Vishal Bipinchandra Doshi (noticee 24).
Mr Bhatia, the SEBI WTM, also noted that the fact that more than 90% of the credit and debit entries in the bank accounts of these entities were either amongst themselves or with MFL shows the level of fraud with which the company perpetrated money transfer scheme with the help of multiple shell entities. "These entities, which had no business operations of their own, functioned as pass-through vehicles and conduits for fund transfer amongst themselves and MFL. Such acts by MFL, a listed company, impaired the rights of the investors and caused harm to the securities market."
SEBI had issued an interim order against Mishtann Foods following a detailed investigation into the company's activities between April 2017 and March 2024. This probe was initiated after complaints of goods and services tax (GST) fraud and financial irregularities.
The investigation revealed several financial discrepancies at Mishtann Foods. The company had negligible fixed assets, negative cash flow from its operations and unusually low inventory compared to its substantial sales figures. SEBI found that these sales were likely fictitious, involving circular fund flows. Moreover, the company misappropriated Rs47.10 crore through fraudulent sales and purchase transactions with its group entities.
Additionally, the number of Mishtann Foods public shareholders saw a dramatic rise, from just 516 at the end of FY17-18 to 4.23 lakh by the September 2024 quarter. Hiteshkumar Patel, the sole promoter of Mishtann Foods, offloaded shares worth around Rs50 crore between July and August 2024. Since March 2024, his holding in the company has been declining, leading SEBI to believe that he might be waiting for the right moment to sell his remaining shares, potentially to the detriment of retail investors.
SEBI found that the company's directors, including Hiteshkumar Patel, Navinchandra Patel, Ravikumar Patel and Jatinbhai Patel, failed to fulfil their responsibilities, leading to the publication of misleading financial statements for seven consecutive fiscal years, from FY17-18 to FY23-24.
As a result, these directors were found to have violated the provisions of the LODR Regulations and they were held responsible for the violations committed by Mishtann Foods.
Furthermore, SEBI issued show-cause notices to the 24 entities, including Mishtann Foods and its key officials, demanding their responses within 21 days.
