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| Posted Date : 16-Jan-2025 , 06:34:41 am | Posted By CASANSAAR |
The market regulator has restrained Pacheli Industrial Finance (PIFL) and six other entities from accessing the securities market until further orders. PIFL, according to its annual report, provides consultancy services related to hotels, lodging houses and other multiple services; and the six other entities were beneficiaries of a preferential allotment that is under scrutiny.
In an interim order issued on January 16, the Securities and Exchange Board of India (SEBI) said that certain facts indicated a pump-and-dump operation in PIFL's stock and involved orchestrating a preferential allotment to benefit a few at the expense of other shareholders. Between December 02, 2024, and January 16, 2025, the share price of PIFL moved from Rs. 21.02 to Rs. 78.2 —an increase of 372 percent in just over a month; and the P/E ratio of the stock had shot up to more than 4 lakh! It was 4,05,664 as of January 16, 2024.
In the order, SEBI's Whole-time Member Ashwani Bhatia noted that all actions of the company's management pointed towards a "well-thought out plan to build a castle in the air". Bhatia also observed that "prima facie" it appeared that the company's statutory auditor GSA and Associates LLP may have been acting in concert with the management and that the auditor's role needs further investigation.
He wrote, "Situations like the one at hand raise fundamental questions about SEBI’s role as the securities market regulator, statutorily mandated to safeguard the interest of the investors."
In the January 16 interim order, SEBI noted that the role of the company's statutory auditor GSA and Associates LLP needs further investigation
On the need to pass an interim order, Bhatia wrote, "While it goes without saying that the power to issue ex-parte interim directions must be exercised with due caution, the regulator also cannot be expected to remain a mute spectator when events of the nature described in this Order are unfolding and brought to its notice. The role of the regulator cannot be limited to stepping in after damage is done, merely to examine the aftermath, and penalize wrongdoers. A more proactive approach may sometimes be required to protect the interests of the investors and maintain investor confidence."
Background
The regulator's surveillance system picked up the price movement in the company's stock which did not appear to be consistent with PIFL's reported financials.
The stock price moved up by 372 percent over a month, between December 2023 and January 2025, though the company did not report any operating income in FY22 and FY23, and reported Rs 1.07 crore in FY24 driven by a bad-debt recovery and interest income from loans. Thus the Price to Earnings (P/E) ratio moved to 4,05,664 (January 16, 2024) —as the SEBI order noted, "an extraordinarily steep valuation showing an apparent disconnect between the share price and fundamentals of the company."
During the regulator's examination, it was found that the company had taken a loan of Rs 1,000 crore from six entities, without revealing the purpose of the loan and financing cost. Later this loan was converted into equity through preferential allotment.
The regulator found that the money raised through this loan was then forwarded to other entities that were connected to the lender entities, and that the funds were finally routed back to these lender entities. Therefore, "the company ended up issuing shares without receiving any consideration".
As the order noted, "the preferential allotment appears to have been part of a well orchestrated effort to expand the share capital of the Company and allot shares to ‘connected’ entities without receiving any consideration, at the cost of the existing public investors".
The lock-in period of the preferential allotment expires on March 11, 2025, Bhatia observed in the order. He wrote, "Action needs to be taken to ensure that such shares are not offloaded in the open market. Therefore, swift action at this stage can help contain the damage and prevent the wider public from being drawn into the scrip—stopping the charade before it takes centre stage."
In the present matter, the role of Statutory Auditor merits attention. It was observed that there were succession of new statutory auditors who were appointed by Pacheli. The present statutory auditory, GSA and Associates LLP, were appointed after the previous statutory auditor who was appointed for a five year period in September 2023, resigned in May2024
Under such circumstances, GSA and Associates LLP should have more circumspect and diligent while doing its duties asa statutory auditor. Further, the scope of the audit also appears to have been limited as the Company did does not appear to have any operations and, therefore, only a few bank transactions needed to bereviewed.
It was also noted that GSA & Associates LLP is the statutory auditor of certain connected entities mentioned in this order (Abhijit, Sunshine and Alstone). Given the above, it prima facie appears that GSA & Associates LLP, may have been acting in concert with themanagement of PIF Land, therefore, their role needs further investigation.
(Source - Asha Menon, Money Control and SEBI website)
Click Below for SEBI Interim Order.
https://www.sebi.gov.in/enforcement/orders/jan-2025/interim-ex-parte-order-in-the-matter-of-pacheli-industrial-finance-limited_90836.html
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