Capital market regulator Securities and Exchange Board of India (SEBI) on Thursday restricted Mishtann Foods Ltd from tapping the capital market for funds, over a host of serious allegations including misappropriation of accounts, fake turnover and bogus billing against the company. The company is restrained from raising money from the public, until further orders, SEBI Whole-time Member Ashwani Bhatia wrote in a 53-pages-long interim order-cum-show cause note, dated December 5. The news comes at a time when Zee Business has learned that the market watchdog is working on a consultation paper suggesting changes in the IPO process for small and medium enterprises (SMEs).

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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.

Here are a few important details of the matter: 

SEBI received a complaint against the company in September 2022, accusing MFL of engaging in several illegal activities incuding circular or dummy turnovers, GST fraud, stock/inventory manipulations, excessive booking of electricity expenses, income tax fraud and bank fraud. The complainant also informed SEBI that MFL MD Hiteshkumar Gaurishankar Patel was arrested by the GST Department for GST fraud amounting to Rs 78 crore. 

Later, in October, SEBI received communication from the Office of the Commissioner of Central GST and Central Excise, Gandhinagar, containing information about MFL’s involvement in largescale manipulation of its books of accounts, revenue, income, and expenditure details by creating fake/paper entities in the form of buyers/suppliers. 

The GST office also stated, after conducting searches on the purported suppliers/buyers of MFL, that many of these supplier/buyer firms were in the names of Patel’s relatives or family members, and that these firms were found to be non-existent or non-operational at their respective business addresses. The GST office also shared with SEBI a list of the allegedly fake, non-existent or non-operational buyers and suppliers along with the amount of the transactions made by MFL with these entities.

Upon completing its investigation, CGST Authority shared a copy of its show cause notice dated July 30, 2024, issued to MFL. 

SEBI then asked BSE to carry out a to surprise site visits to MFL’s office and factory,  and to the addresses of some of the company’s buyers and supplier. After conducting the site visits, BSE submitted its report on the matter in August 2024, observing that most of the entities were not found at their registered addresses. 

5 key findings in the detailed investigation

A thorough investigation into the matter revealed five important findings, as listed below: 

  • MFL’s failure to furnish information and non-cooperation with the investigation 
  • Misrepresentation/mis-statements in MFL’s financial statements 
  • Related-party transactions without requisite approvals
  • Investigation findings on MFL’s diversion, misutilisation or misappropriation of funds 
  • Investigation findings on corporate governance failures

Mishtann Foods, Hiteshkumar Gaurishankar Patel, Navinchandra Dahyalal Patel, Ravikumar Gaurishankar Patel and Jatinbhai Ramanbhai Patel are restrained from buying, selling or dealing in securities, or accessing capital market either directly or indirectly, in any manner whatsoever until further orders, besides other actions, according to the SEBI order. The said entities can close out or square off any open derivative positions within seven days from the date of order or at their respective expiry dates, whichever is earlier. 

SEBI said that in response to its summonses, Devalkumar Bharatbhai Patel, Jatinbhai Ramanbhai Patel, Kanakkumar Vinodbhai Patel and Surendra Kumar Yadav failed to appear before it. They also failed to furnish “information such as audited financial statements, details of bank accounts, ITRs, etc. pertaining to these buyers/sellers, without any justifiable reasons for such failure and thus, are prima facie found to have violated the provisions of section 11C (5) of SEBI Act, 1992”, it said. 

The SEBI order also contained findings on detected inflation of MFL’s sales and profit during FY24. “As per the consolidated financial statement of MFL for FY24, the revenue of MFL’s Dubai-based wholly owned subsidiary (“WoS”), viz., Grow and Grub Nutrients FZ LLC amounting to Rs. 967 crore was consolidated in MFL’s revenue. However, on a standalone basis, the revenue of MFL during FY24 (Rs 322 crore) was only 50 per cent of the previous FY’s standalone revenue of Rs. 650 crore,” said SEBI. 

The market watchdog also mentioned the impact of the misrepresentation and mis-statement in financial statements on MFL shares. 

“The deliberate misreporting of the financial statements of MFL misled and defrauded the investors of MFL who made a decision to invest in the MFL scrip under the impression that the financials of MFL were reflecting a true and fair view of its performance which had a significant impact on the price of the MFL scrip during the Investigation Period. The share price of MFL went up from Rs. 27.30 on August 01, 2018 (first day of trading during the IP) to Rs. 118.25 on October 31, 2018, before declining to Rs.17.58 on March 28, 2024 (end of the Investigation Period),” added SEBI. 

What is Mishtann Foods and what does it do?

Incorporated in February 1981, Mishtann Foods is a public limited company engaged in the processing and manufacturing of rice, wheat and other agricultural products. The company entered the listed space in 2016. 

At the end of the September quarter, Mishtann Foods’ paid up capital stood at Rs 108 crore. 

As of December 3, its market capitalisation—or market value—stood at Rs 1,633 crore.