Frauds on the rise with modes more ingenious: Sebi chief Tuhin Kanta Pandey

Securities and Exchange Board of India (Sebi) chairperson Tuhin Kanta Pandey on Friday spotlighted the misuse of preferential allotments by promoters and misleading disclosures by firms in various instances of financial fraud that were against the interests of retail investors

“The ingenious modus operandi used to perpetrate these frauds have ranged from simple diversion of shareholder funds to the use of complex structures and transactions to circumvent regulatory safeguards,” Pandey said at an event organised by the Institute of Chartered Accountants of India (ICAI).

Citing recent cases unearthed through Sebi’s forensic audits, Pandey spoke about misleading disclosures made just before the expiry of the lock-in on the shares issued under preferential allotment.

“This enables the preferential allottees to exit at a profit but at the expense of innocent retail investors who believed in the disclosures,” he said.

Pandey spoke about an instance where the proceeds from preferential allotment were siphoned off. Sebi observed that the funds raised were round-tripped to the allottees in the preferential allotment through complex, multi-layered transactions.

“Forged bank statements were submitted to Sebi to show receipt of funds by the company. The statutory auditor also failed to report this structured circulation of funds.”Pandey expressed concern about how some of the listed entities transferred assets to subsidiaries, which then raised loans used to repay obligations of promoter-linked entities.The Sebi chief said companies inflated their financials by routing funds through “name lending” entities in circular transactions, ultimately siphoning off shareholders’ money.

Pandey said the negative impact of such financial frauds on the securities markets is tremendous.

“Beyond loss to shareholder wealth, they erode investor confidence, discourage genuine investment, and directly undermine market integrity.”