In today's Finshots, we take a closer look at the scam that unfolded at Mishtann Foods Limited.

The Story

Over the weekend, I was battling a fever, and what better way to make the most of it than diving back into the classic Scam 1992? It’s one of those shows that doesn’t just entertain—it educates. Especially about how money can go astray in the stock markets.

One lesson that stuck is the story of Mazda Industries and Leasing Ltd. If you’ve seen the show, you’ll remember this stock. In 1992, its price was soaring as if it were destined to become the next blue-chip darling of the market. But when journalist Sucheta Dalal investigates, she discovers the grim reality—a board outside an old door with a lock in a dilapidated building, a hollow entity with no operations, no employees, no management. Nothing. Nada. It was just a name on paper. And that's what we call a classic paper company – existence on just paper rather than in actuality.

And what was the fraudsters' game here? Simple. Get the stock price rolling sky-high, lure in unsuspecting investors, and then dump the stock when prices are high. The early movers walk away rich, while the late entrants watch their dreams—and their money—crash to the ground. And that's what happened. The stock of the company rose from ₹20 to ₹1,600, only to settle at about ₹75 in 1994.

But why bring up Mazda today, you ask?

Well, because we’ve got a modern-day déjà vu. Enter Mishtann Foods Ltd.

Mishtann Foods began its journey in the world of cement. Yep, at its inception in 1981, the company was called HICS Cement. But in 1994, it saw some opportunity in the food processing sector, renamed itself Mishtann Foods Limited, and entered the business of basmati rice, wheat, dal and salt. Over the years, it became one of the top basmati rice processors, and today, over 90% of the company's sales come from the basmati market. But while the aroma of its rice might be alluring, the stench of its financials is overpowering.

Why do we say that?

Mishtann Foods crafted an illusion of booming sales and skyrocketing growth. But behind the doors, there was manipulation of the highest order.

From sales of ₹5 crores in FY14, it went on to report a four-digit sale of over ₹1,200 crores in FY24. That's stellar growth. But it wasn't so stellar behind the curtains.

Fake buyers, sham suppliers and paper entities—many of which were linked to relatives of the company’s management. These weren’t real businesses and just created to inflate revenues and fabricate financial statements.

The company’s profits and cash flows also narrated a stark story.

While the sales were rising, the profits weren't. In fact, in FY16, when it reported sales of ₹121 crores from ₹3 crores in FY15, the profits remained flat at zero. And they went on to remain like that up until FY17, when the sales were an impressive over ₹250 crores.

As for the balance sheet and cash flows, one could see negligible assets. Negative operational cash flow. And inventory levels that didn’t add up to the supposed sales figures. It was like watching a magician pull rabbits out of thin air. But the rabbits were numbers, and the magic was fraud.

Nevertheless, this was ignored by most as people went on investing while the company's stock price kept rising. Until recently, when many reached out to SEBI through the redressal platform called SCORES and pointed out a host of issues in 2022, including not only dummy sales but also GST fraud, inventory manipulation and income tax as well as bank fraud.

It also highlighted that Hiteshkumar Patel, the company's Managing Director, was booked for a GST fraud worth ₹78 crores.

When SEBI reached out to the GST department, it found out the details were true and that the company was, in fact, manipulating its books. It also found out that the buyers and suppliers of the company were none other than the relatives of the company operating like paper entities.

For context, let’s look at one of the key entities Mishtann Foods claimed to do business with—Arihant Corporation. As per the investigation, Arihant Corporation conducted transactions worth ₹175 crores with Mishtann. This meant Mishtann should have received these funds in their bank accounts. And it did…seemingly.

But here’s the twist. The money Arihant “paid” to Mishtann actually came from one of Mishtann’s own group companies—basically a shell entity—before being funneled into Arihant. In reality, no actual funds changed hands. It was just a circular entry in the books.

This gave the illusion of legitimate business and deceived investors into thinking the company was thriving. To make matters worse, some members of Arihant’s management were also found to overlap with those of Mishtann Foods.

So yeah, it was like opening a can of worms.

But it didn't end there. SEBI decided to take a closer look at Mishtann Foods’ books of accounts. But the company had a convenient excuse — claiming a fire in 2022 had destroyed most of its records, including income statements. When SEBI asked for the financials from FY23 and FY24, Mishtann simply couldn’t deliver those either.

The deeper SEBI dug, the murkier things got. Mishtann had also orchestrated rights issues—offering shareholders discounted shares under the guise of funding growth. But instead of building the business, the funds seemed to vanish into thin air. In 2024, for instance, close to ₹50 crores raised through a rights issue mysteriously found its way into the pockets of insiders, including related parties and directors.

The pattern was undeniable. Money flowed in from investors but ended up benefitting those on the inside. And as SEBI’s investigation unfolded, the cracks turned into chasms. Fictitious transactions. Nearly ₹100 crores siphoned off. It was a house of cards held together by lies.

SEBI didn’t hold back. It banned Mishtann Foods and its management from accessing the securities markets for seven years. The company was ordered to recover ₹49.82 crores from the rights issue and ₹47.10 crores from bogus sales. And key executives, including the MD, were barred from associating with any listed company or SEBI-registered entity. It was a decisive move to protect investors and send a message to uphold the integrity of the market.

And maybe, just maybe, this move will offer some relief to retail investors who lost their hard-earned money after the stock’s plunge.

But this story isn’t just about Mishtann Foods. Because chances are you’ve already heard about the debacle by now.

We went on writing this post because it’s about the lessons we, as investors, could learn which is that when something seems too good to be true, it often is. It's about remembering what Charlie Munger once famously said, “When you locate a bargain, you must ask, 'Why me, God? Why am I the only one who could find this bargain?'”

So yeah, if you’re being handed extraordinary returns on a platter, it’s worth asking why.

Take Mishtann’s financials. They were screaming red flags. Sales were growing exponentially, but profits? Flat as a pancake. Cash flows? Negative. And promoter holding? On a steep decline in less than a year—from 49% by the end of 2023 to 43% in September 2024. In fact, Hiteshkumar Patel sold shares of the company between July and August and raised around ₹50 crores through it. The writing was on the wall for anyone willing to look closely.

And yet, during market euphoria, it’s easy to miss these warning signs. The hope of riding the wave to quick profits blinds investors to the risks. Many convince themselves they’ll exit just in time. But here’s the harsh truth. Someone always ends up holding the bag, and more often than not, it’s the retail investors.

Today, lakhs of retail investors are stuck with Mishtann Foods. Their financial fate now hinges on whether the company can recover the misappropriated funds. It’s a cautionary tale, reminiscent of the infamous Mazda during the Harshad Mehta scam. Back then, Mazda’s stock soared to dazzling heights, only to crash into oblivion.

So yeah, the next time a stock (or any opportunity) promises you the moon, pause and take a step back. Dig into the management’s track record. Check how their shareholdings have shifted over the years and why. Scrutinise the financials ― from the P&L statement to balance sheet, and importantly the cash flows. And then ask yourself the tough question ― “Why me, God? Why me?”

And it’s not a hard thing to do, really. Because as another Charlie Munger quote goes, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

In the markets, if it looks too good to be true, it almost always is. And sometimes, the smartest move you can make is simply avoiding being the last one holding the bag.

Until next time…

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