India puts brakes on a 10,000% stock rally over fake disclosures

India’s securities market regulator on Monday (Dec 23) suspended trading in shares of Bharat Global Developers, the latest in a string of crackdowns on companies manipulating their stock price through accounting frauds and fake disclosures.

Bharat Global falsely claimed to have won large orders from corporates such as Reliance Industries, Tata Group, McCain India Agro and UPL, the Securities and Exchange Board of India (Sebi) said in an initial order.

Shares of the Gujarat-headquartered company surged over 10,000 per cent in the 12-month period ending November as it announced forays into market-fancied sectors like defence, aerospace and agro technology, and then followed it up with a series of disclosures to stock exchanges about “high-value orders” from marquee corporates.

The case underlines the dark side of India’s stock market boom that has seen its equity benchmarks treble since the pandemic amid a rush of small investors dazzled by impressive returns. It also comes barely a week after the regulator tightened rules related to listing of tiny companies, a segment prone to pricing manipulation and frauds.

Prior to that, the regulator cancelled the initial public offering of Trafiksol ITS Technologies after a probe revealed a key vendor of the company to be a shell entity. 

Bharat Global had allotted about 100 million shares to 41 investors through preferential share offerings in April and August at significant discount to market price, the Sebi order showed. The regulator alleged that the disclosure of the orders from October by the company were “false and misleading” and were timed to “benefit” investors of the share offerings.

The regulator found that following such disclosures, 13 of the 41 investors in the preferential share offering offloaded their holdings for US$31.7 million after the lock-in period ended on Oct 31. Subsequently, the number of public share owners rose four-fold to over 40,000, indicating that many unsuspecting investors bought the stock.

“Material disclosures of the company and the actions of the preferential allottees appear to have been planned towards sale of shares to make huge profits.” Sebi member Ashwani Bhatia said in the order. 

Bharat Global reported negligible revenues and profits prior to the fiscal year ending March 2024, and had its shares suspended for trading until November 2023 over non-payment of listing fee to the BSE.  

Sebi has consequently barred several investors in the preferential offerings from accessing the capital markets, while also impounding the “unlawful gains” made by the investors. BLOOMBERG