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Pump and Dump: SEBI's Interim Order on SME Stock Manipulation

Finsec Law Advisors

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The Securities and Exchange Board of India (“SEBI”) recently issued an interim ex-parte order concerning Pacheli Industrial Finance Limited (“PIFL”), uncovering a complex web of financial irregularities and manipulative practices. The case raises critical questions about market integrity, investor protection, and regulatory oversight in India’s capital markets. The investigation was triggered by an unexplained surge in PIFL’s share price between December 2024 and January 2025. During this period, the price soared by an extraordinary 372%, climbing from ₹21.02 to ₹78.20. This dramatic rise was particularly alarming given the company’s placement in Additional Surveillance Measure (ASM) Stage 4, a regulatory mechanism intended to monitor stocks prone to excessive volatility. Despite being under surveillance, PIFL consistently hit the daily 5% upper circuit, raising suspicions about market manipulation. The sharp rise in share price appeared entirely disconnected from the company’s financial fundamentals, which were characterized by negligible revenues and a lack of substantial operations.

PIFL’s financials over the last three fiscal years (FY22-FY24) highlight the incongruity between its market performance and its actual business activities. The company reported no operating revenue in FY22 and FY23 and a modest ₹1.07 crore in FY24, primarily derived from bad debt recovery and interest income. The company’s profit margins were minimal, and its Price-to-Earnings (P/E) ratio skyrocketed to an astonishing 4,05,664. Such figures indicated a significant disconnect between the company’s fundamentals and its valuation, further indicating the improbability of its market cap reaching over ₹4,000 crore.

SEBI’s probe into the company’s financial dealings revealed a pattern of suspicious transactions. PIFL claimed to have raised a loan of ₹1,000 crore, which was later converted into equity shares issued on a preferential basis. However, SEBI’s investigation revealed that the funds purportedly loaned to PIFL by six preferential allottees were round-tripped. The allottees transferred funds to PIFL, which then forwarded these funds to intermediary entities. These intermediaries ultimately returned the money to the allottees, completing the cycle without any actual infusion of capital into the company. The round-tripping mechanism effectively meant that PIFL did not receive genuine consideration for the preferential allotment of shares. This elaborate scheme allowed the company to create the illusion of financial activity while inflating its share capital artificially.

SEBI’s investigation also revealed connections among the preferential allottees, suggesting a coordinated effort. Several entities shared common addresses, incorporation dates, and cross-holdings. For example, the allottees were all located at the same address and exhibited overlapping management. This network of interconnected entities strongly indicated a concerted scheme to manipulate the company’s financials and market position.

The issues identified by SEBI in this case are manifold. The preferential allotment of shares, ostensibly against the conversion of loans, was conducted without proper consideration. This raises serious concerns about compliance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”). While the ICDR Regulations exempts preferential issues arising from loan conversions, SEBI’s investigation concluded that the loans in question were fictitious, rendering the exemption inapplicable. By issuing shares to connected entities under the guise of loan conversion, PIFL effectively circumvented regulatory safeguards designed to protect investors.

Market manipulation was another critical issue. The dramatic increase in PIFL’s share price was not driven by genuine market forces but rather by deliberate actions to inflate the company’s valuation. With 99.28% of its shares locked in with the preferential allottees, only a minuscule portion of shares were available for public trading. This restricted float allowed the company to maintain an artificially high share price, creating a misleading perception of value. Such practices are classic hallmarks of a “pump and dump” scheme, wherein the price of a stock is artificially inflated to lure unsuspecting investors before the inflated shares are offloaded in the market, leading to significant losses for retail investors

The impact of such schemes on retail investors is profound. Retail investors, who often lack the resources to scrutinize a company’s financial intricacies, rely heavily on market signals like price movements and trading volumes. In a pump and dump scheme, these signals are distorted, leading investors to buy shares at inflated prices under false pretences. When the manipulators exit by selling their holdings, the stock price crashes, leaving retail investors with substantial financial losses and eroding their trust in the market. The broader financial markets also suffer from such schemes. Pump and dump operations undermine the efficiency of price discovery, a core function of capital markets. Artificially inflated prices and manipulated trading volumes distort market stability, increasing volatility and creating uncertainty. Moreover, these practices divert capital from genuine, growth-oriented businesses to fraudulent entities, hindering the optimal allocation of resources. Over time, such schemes weaken investor confidence, posing long-term risks to market integrity and economic growth.

Our view

SEBI’s analysis highlights how the preferential allotment and subsequent manipulation of PIFL’s shares were part of a larger, well-orchestrated scheme. The company’s actions not only violated the ICDR Regulations but also circumvented the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which mandate disclosures and protections in cases of significant ownership changes. By disguising their acquisitions as loan conversions, the preferential allottees avoided triggering these regulatory requirements, further eroding transparency and accountability.

The order underscores the need for a proactive approach in identifying and curbing market manipulation. SEBI has directed to freeze the shareholdings of the preferential allottees and barred the Noticees from accessing the capital markets. SEBI has taken decisive steps to prevent further harm to public investors. The investigation into PIFL’s activities is ongoing, and SEBI has emphasized the need for stringent measures to uphold market integrity and investor confidence. This case serves as a cautionary tale about the risks of unchecked financial manipulation and the importance of regulatory vigilance. It highlights the need for robust governance and transparency to ensure that India’s capital markets remain a fair and equitable platform for all participants.

You can mail us your queries or comments at Manas Dhagat.

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