Mint Explainer | How Sebi uncovered a ₹430 crore fraud and saw through a ‘kidnap ransom’ claim

The investigation into Seacoast Shipping Services Ltd (SSSL) was initiated after BSE Ltd flagged significant irregularities pertaining to a "considerable increase in the net sales and net profit" of SSSL during fiscal year 2021 (FY21).

The probe, which covers the period from April 2020 to December 2023, places promoter and managing director Manish Shah at the centre of a scheme designed to manipulate financial statements, mislead investors, and illegally siphon funds.

Mint breaks down Sebi’s findings and the elaborate fraud.

What is Sebi's case against SSSL?

Sebi's investigation concluded that SSSL, supposedly engaged in the shipping and logistics business, and its promoters perpetrated a massive fraud by fabricating its financial statements to present a false picture of exponential growth.

The regulator found that over 85% of the company's sales and more than 98% of its assets during the three-year investigation period were fictitious. This deception created a false market for SSSL’s shares, attracting a spike in retail investor interest, with the number of public shareholders growing to almost 250,000.

While retail investors were drawn in by the inflated numbers, the promoters systematically divested their stake, with their shareholding plummeting from a peak of 73.97% to 0.04%.

According to Sonam Chandwani, managing partner at KS Legal, the fact that "public shareholding swelled massively while the promoters exited almost entirely underscores how the manipulation was structural, not opportunistic."

How did the company inflate its revenue?

Revenue was inflated through a series of sham transactions designed to create the illusion of a thriving business. A significant portion of the revenue was booked from sham sales to non-existent or defunct entities.

In FY21, SSSL recorded sales of ₹81.35 crore to a Singapore-based company, Bimstar Holdings Pte Ltd. Sebi found that this entity was already defunct and had been struck off Singapore's corporate register, making the transaction impossible.

To balance the inflated sales, the company recorded fake purchases. In FY22, SSSL claimed to have made purchases worth ₹94.06 crore from Safe Cargo Shipping Services Pte Ltd, another Singapore-based company. However, the regulator found no evidence of corresponding payments from SSSL's bank accounts to this entity.

In instances where money did move, it was part of a closed loop. Funds were passed through a series of entities only to return to their origin, creating a paper trail of transactions with no real underlying business activity or commercial rationale.

Why did the company shift to trading in agro-products?

The shift into trading agro-commodities was a deliberate tactic to obscure the fraud, Sebi found.

After initially operating in the shipping and logistics space, SSSL began reporting substantial revenue from this new business segment. This move was strategically chosen because agro-products are exempt from the goods and services tax.

According to a statement made by promoter Manish Shah during the investigation, this exemption made it easier to generate fictitious revenue as the transactions were difficult to verify through tax records.

Sebi concluded that all the revenue from the agro-business was fictitious and existed only "on paper," with no actual goods ever traded.

What was the promoter’s role in this?

According to Sebi, Shah abused his dominant position to mastermind the entire operation. His role included directing the fictitious allotment of shares, masterminding the misrepresentation of financial statements, and diverting company funds.

The investigation also found that he was directly involved in the creation of some of the shell entities used to perpetrate the fraud.

What was the promoter’s defence against these allegations?

Shah's defence was marked by a series of contradictory claims that evolved as the investigation progressed.

Manish Shah provided a sworn confession during the investigation, admitting that the majority of the company's revenue was fictitious and that the agro-commodity trades were only on paper.

However, he subsequently retracted this confession in an affidavit, alleging that he was terrorized by Sebi officials and that his statements were made under duress and coercion. He claimed he was threatened with consequences if he did not provide responses that the officers desired.

How did Sebi respond to these shifting defences?

The regulator's final order systematically dismantled Shah's claims. Sebi pointed out that while Shah retracted one statement, he failed to retract others made on other dates admitting to the fictitious nature of the transactions.

The regulator stressed that its findings were corroborated by independent evidence, including bank statements, the lack of GST data, and the non-existence of counterparties, and did not rely solely on his confession.

“There is no force in the submission that Manish Shah had been coerced or put under duress/pressure by officials during statement-recording since no proof of alleged coercion or duress by officers has been shown in this regard," Sebi wholetime member Kamlesh Varshney recorded in the order.

Sebi noted that Shah, an educated MD of a listed company, “could not be equated with a layman who might not have been aware of the consequences of his elaborate and detailed statements given on oath."

Were other funds mishandled?

Sebi said the misdeeds extended beyond revenue inflation. Its investigation also uncovered that SSSL had diverted ₹43.42 crore from the proceeds of a rights issue.

Instead of being used for stated business purposes, the money was siphoned through a complex web of transactions, representing another layer of fraud against shareholders who had invested in the company.

When questioned about funds diverted from the rights issue, Manish Shah’s wife, Cheryl Shah, claimed the money was used to pay a kidnapping ransom for their son.

Legal experts viewed these defences as weak. Chandwani noted that the kidnapping claim was a "legally disastrous" argument.

"In securities and regulatory litigation, defences that are extraordinary but unsubstantiated tend to backfire. They injure the credibility of all of their other defences," she said.

Senior securities lawyer Chirag M. Shah noted that this argument was a sideshow that would not alter the core of the case.

“The primary allegations are about a multi-year scheme of fraudulent transactions and revenue inflation," he said.

What penalties did Sebi impose?

In its final order, Sebi issued a slew of stringent directions to protect the market and penalize the wrongdoers. SSSL has been restrained from raising any money from the public until further orders. Manish Shah and other promoters and related entities have been barred from buying, selling, or dealing in securities, or accessing the capital market in any manner.

Sebi ordered the impounding of unlawful gains. For Manish Shah alone, this amounts to over ₹47.89 crore. Other entities have been directed to collectively deposit about ₹70 crore into an escrow account. These entities are a group of non-promoters: Parasmal Kundanmal Shah, Parasmal Kundanmal Shah HUF, CSB Projects Pvt. Ltd, Credo Holdings Pvt. Ltd, Deep Shah and Shail Shah who took part in a preferential allotment.

The current promoters, Manish Shah and Sameer Shah, took control of the already-listed SSSL from the erstwhile promoter, Safal Constructions India Pvt. Ltd, through a share purchase agreement dated 22 November 2019, which triggered an open offer in 2020.

In August 2020, SSSL raised ₹7.88 crore through a preferential allotment to other non-promoter directors. It also made a non-cash allotment of 15 million shares (valued at ₹22.73 crore) to Manish Shah against the purported takeover of his HUF business, an allotment Sebi later deemed fraudulent.

The company has been directed to bring back the diverted funds from the rights issue and to set up a new audit committee to ensure credible financial reporting in the future.

However, the path to recovery for the almost 250,000 public shareholders of the company remains challenging. According to Chandwani, they may pursue class-action-style suits against the company and its directors.

“They can also seek compensation or invoke capital markets consumer protection in civil courts", she said, adding a disclaimer that coordinating such a massive cohort is practically difficult. “This case, however, vividly exposes that regulators cannot carry all burden; stronger gatekeeper (audit, board, statutory auditor, merchant banker) regulation is overdue."

Meanwhile, Shah expressed skepticism that shareholders would be able to reclaim their losses, despite Sebi's order for the promoters to disgorge over ₹47 crore. The principle of caveat emptor, or "buyer beware," often applies in such market situations, he noted.