Sebi Restricts Mishtann Foods and Hiteshkumar Patel from Securities Markets Over Financial Mismanagement

Sebi has taken action against five entities, including Mishtann Foods and its promoter and CMD, Hiteshkumar Gaurishankar Patel. They are barred from the securities markets until further notice due to alleged financial mismanagement and fraudulent activities. The regulator also prohibited Mishtann Foods Ltd (MFL) from raising public funds and restricted 12 individuals, including key officials, from associating with any Sebi-registered entity or listed company.

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During the investigation, Sebi discovered that MFL had negligible fixed assets and negative cash flow from operations. Despite significant sales figures, the company maintained a low inventory, suggesting fictitious transactions involving circular fund flows. Additionally, the number of public shareholders in MFL surged from 516 at the end of FY18 to 4.23 lakh by September 2024.

Fraudulent Transactions and Corporate Governance Lapses

Hiteshkumar, the sole promoter of MFL, sold shares worth around Rs 50 crore between July and August. The promoter's holding has been decreasing since March 2024, indicating a strategy to offload shares at the expense of retail investors. Sebi noted that Mishtann Foods engaged in fictitious sale/purchase transactions with group entities, misappropriating Rs 47.10 crore.

Ashwani Bhatia, Sebi's whole-time member, stated that Hiteshkumar and other directors failed in their duties. This led to misleading financial statements for seven consecutive fiscal years from FY18 to FY24. These directors were found to have violated LODR regulations and were responsible for MFL's violations.

Misuse of Rights Issue Proceeds

In May 2023, Mishtann Foods filed a draft letter for a rights issue of Rs 150 crore with Sebi but later withdrew it. Subsequently, in April 2024, they launched a rights issue worth Rs 49.9 crore. The proceeds were misappropriated by transferring them to partners/directors of group entities. In August 2024, MFL filed another draft letter for a rights issue under Rs 50 crore.

Sebi observed that MFL intended to bypass regulatory oversight by withdrawing the initial Rs 150 crore rights issue and raising funds in smaller tranches below Rs 50 crore. Given Mishtann Foods' track record, there is concern that future rights issues could lead to further diversion of funds.

Regulatory Actions and Future Implications

Sebi directed MFL to return Rs 49.82 crore misused through group entities and Rs 47.10 crore diverted to promoters/directors via fictitious transactions. The regulator also instructed BSE not to approve any rights issue applications from MFL until further notice.

Additionally, Sebi issued show-cause notices to 24 entities, including MFL and its key officials, questioning why an inquiry should not be conducted against them. They are required to respond within 21 days. This interim order follows a detailed investigation covering April 2017 to March 2024 after complaints of GST fraud and financial irregularities by Mishtann Foods.