Financial frauds in the Indian capital markets have evolved from simple diversions of shareholder funds to complex schemes involving regulatory arbitrage, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey said on Friday.
Addressing the Future Proof Forensics 2025 event held in Mumbai, the SEBI chief highlighted how the market regulator has used forensic audits to uncover several such frauds in recent times.
Shell structures and promoter-linked diversions
“We must safeguard market integrity, the foundation that fuels investor participation and sustains capital formation,” ANI quoted him as saying.
Citing examples of egregious cases, Pandey said SEBI investigations have revealed several instances where listed companies engaged in fraudulent practices to siphon off investor funds.
He highlighted that in a case, a listed entity transferred its assets to a subsidiary company.
He said “SEBI has unearthed transactions where the listed entity transferred assets to its subsidiary. The loan obtained by the subsidiary against these assets were then used to repay the outstanding loan of a promoter linked entity”.
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Round-tripping, misleading disclosures under scanner
In another instance, a company inflated its financials by entering into circular transactions with a number of named lending entities. The promoters subsequently siphoned off shareholder funds or assets through related-party transactions under the pretext of purchases or sales made to or from their own companies.
Pandey said SEBI also found that proceeds from preferential allotment, which should result in cash flow to the company, were instead siphoned off.
In one case, the funds raised through preferential allotment were round-tripped back to the allottees themselves using complex, multi-layered transactions. He added “Forged bank statements were submitted to SEBI to show receipt of funds by the company. The statutory auditor also failed to report the structured circulation of funds”.
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The SEBI chairman also warned about the misuse of preferential allotment and misleading disclosures. He said that misleading information is sometimes deliberately made public just before the expiry of the lock-in period on shares issued through preferential allotment.
This enables the preferential allottees to exit at a profit, often at the cost of retail investors who trust the misleading disclosures.
“These are egregious cases. I’m not saying this is a generalised phenomenon. I’m just giving you certain examples of egregious cases which have been detected,” Pandey said. He added that the negative impact of such financial frauds on the securities market is tremendous and SEBI is doing forensic audits to uncover these kind of financial frauds.
(With inputs from ANI)
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