PE at 4,00,000! SEBI bans entities for 'pump & dump' in this SME stock; key details

Capital markets regulator Sebi on Thursday banned seven companies from trading after it found an SME stock's price-to-earnings (P/E) ratio abnormally topped 4,00,000-level, indicating a 'pump and dump' operation. Sebi barred Pacheli Industrial Finance Ltd (PIFL), Abhijit Trading Company, Calyx Securities, Hibiscus Holdings, Avail Financial Services, Edoptica Retail India and Sulphur Securities.

These entities are hereby restrained from buying, selling or dealing in securities, or accessing capital market either directly or indirectly, in any manner whatsoever till further orders, said Ashwani Bhatia, wholetime member at Sebi. Pacheli Industrial is yet to respond to the regulator's ban.

"Given the above, I have no hesitation in holding that the right course of action to adopt in the present matter is to direct freezing of the shareholding of the preferential allottees pending investigation. There is also a need for restraining the company from accessing the capital markets during the pendency of the investigation. The investor protection and anti-fraud measures under the securities laws cannot be allowed to turn into 'covenants without swords'," Bhatia added.

Unfolding the matter, the watchdog said it witnessed a company (PIFL) which was consistently reporting negligible revenues suddenly taking on a Rs 1,000 crore loan without making any disclosures on how the funds would be utilised or the loan serviced. PIFL's stock settled 5 per cent higher at Rs 78.19. At this value, it has gained 191.75 per cent in a month and 421.27 per cent in six months.

"The company did not record any operating income in FY22 and FY23. Further, the operating revenue of Rs 1.07 crore reported in FY24 was driven by bad debt recovery (Rs 0.44 crore) and interest income from loans (Rs 0.63 crore). Consequently, the Price to Earnings (P/E) ratio moved to 4,05,664 (January 16, 2024) — an extraordinarily steep valuation showing an apparent disconnect between the share price and fundamentals of the company," the Securities and Exchange Board of India stated.

"Subsequently, the loan, which appears to have been availed from connected entities, was converted into equity. The examination of the bank statements of the Company and connected entities prima facie revealed that the funds that were advanced as loan was round-tripped and the Company ended up issuing shares without receiving any consideration. By the aforesaid actions, the six preferential allottees ended up holding 99.28 per cent of the expanded share capital of the company," it added.

"By adopting the above modus operandi, the company's market capitalisation (m-cap) jumped from about Rs 40 crore to more than Rs 4,000 crore within a period of just over 8 months. Apart from the conversion of the fictitious loan into equity, the surge in share price was also fuelled by a minuscule free float - just 0.72 per cent of its shares were available for trading as the remaining 99.28 per cent of shares issued pursuant to the preferential allotment were locked-in. With such a small float, natural market dynamics were effectively bypassed—becoming a case of the tail wagging the dog. The PE ratio of the company has shot up to more than 4,00,000 – a sobering statistic that underscores the gravity of the situation. While it is said that value cannot be conjured from thin air, this scheme comes disconcertingly close," Sebi also said.

"The trading pattern and share price movement in the scrip prima facie appears to indicate that a 'pump and dump' operation may be playing out in the scrip. The purpose, from all the actions of the management starting with the Rs 1,000 crore borrowing and its subsequent prompt conversion to equity appears to point towards a well-thought-out plan to build a castle in the air. The price movement witnessed in the scrip also points in this direction. This aspect requires further investigation.

It is noted that the number of public shareholders in the company has not seen a significant uptick over the last three months. Further, the lock-in pursuant to the preferential allotment expires on March 11, 2025. 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," the regulator further stated.

PIFL is yet to respond to the regulatory ban.