The Securities and Exchange Board of India (SEBI) has launched a crackdown on companies accused of diverting funds raised through rights issues, following whistleblower complaints. The capital markets regulator is investigating four to five entities, primarily small and dormant firms, for allegedly siphoning off money meant for business expansion into promoters’ personal accounts or front companies.

Rights issues, where existing shareholders are offered discounted shares to raise capital, have become a hotspot for misuse. Unlike pump-and-dump schemes, these diversions don’t immediately affect stock prices, making them harder to detect without insider tips. SEBI has identified a troubling pattern and is addressing the issue both case-by-case and at a systemic level.

In a notable case, SEBI’s interim order on December 5, 2024, against Mishtann Foods Ltd. revealed the company redirected rights issue proceeds to promoters and related entities. Initially planning a Rs 150 crore issue, Mishtann scaled it down to smaller offerings below Rs 50 crore to dodge scrutiny. SEBI barred the firm from raising public funds, banned its promoters from trading, and ordered repayment of Rs 49.82 crore misappropriated and Rs 47.10 crore from fictitious deals. A new audit committee was mandated to enforce compliance.

Similarly, on December 11, 2024, SEBI acted against Debock Industries Ltd., uncovering manipulated financials, fake bank statements, and diverted rights issue funds. The company used fictitious preferential issues to shift to the Main Board. SEBI responded with strict trading and market access bans.

These actions underscore SEBI’s push to protect investors and tighten oversight on fundraising mechanisms. With BSE directed to block further rights issues from offenders like Mishtann, the regulator signals a broader clampdown on financial misconduct, ensuring funds serve their stated purpose rather than personal enrichment.