Manpasand Beverages scam: How Sebi exposed the Rs 40-crore GST fraud

The Vadodara-based Manpasand Beverages has been at the centre of controversy since Deloitte resigned as its auditor in May 2018

Securities and Exchange Board of India (Sebi) has barred Manpasand Beverages Ltd (MBL) and its top officials and directors from the securities markets for a period of three years from now and also imposed a total penalty of Rs 74 lakh for manipulating and mis-reporting the company's financial statements.

The Vadodara-based company has been at the centre of controversy since Deloitte resigned as its auditor in May 2018.  Things went downhill after its top brass was arrested for the goods and services tax (GST) fraud of Rs 40 crore in 2019.

Here's what happened

Type of fraud: GST fraud, fake company units

 

Amount: Tax evasion of over Rs 40 crore

Perpetrators: Manpasand Beverages' directors and top officials

Modus Operandi

The company was set up in 1998 by Dhirendra Singh. In the following years, the company focused on rural markets and tier-2 and tier-3 cities to grow its presence, as opposed to its rivals who made metros their target.

In 2018, the company's distribution was at its peak with 600,000 outlets across India, as well as three plants in Vadodara, Varanasi and Sri City. The beverage company had plans to set up its fourth plant. But, the unearthing of the tax scam by the Central GST Commissionerate Vadodara showed that the company had used this network to operate through fake units..

Manpasand had created 38 bogus/paper firms to inflate its turnover, and that inward and outward transactions made with such bogus firms amounted to Rs 188.48 crore and Rs 691.30 crore, respectively.

Further, Manpasand also used input tax credit from fake invoices for payment of GST liabilities, resulting in a loss of GST revenue to the exchequer. The quantum of GST evaded was to be ascertained only after completion of the investigation.

PMS fund manager Amit Mantri tweeted, "Essentially everything was fake. The company existed only on the stock market and not in the real world."

Impact

Tax evasion of Rs 40 crore was committed involving a turnover of Rs 300 crore, according to the CGST Commissionerate.

How did the scam unravel?

The situation deteriorated for the company when Deloitte stepped down as its auditor in May 2018. The scenario worsened when MBL's senior executives were detained in 2019. Managing Director Abhishek Singh and two other individuals were apprehended for allegedly committing a GST fraud of Rs 40 crore, as identified by the investigators from Central Goods and Services Tax (CGST) Commissionerate Vadodara-II. Following their court appearance, they were remanded to judicial custody.

On May 23, 2019, extensive searches were carried out at multiple MBL locations, revealing a scheme involving the creation of fictitious units to exploit fraudulent credits and evade taxes amounting to Rs 40 crore on a turnover of Rs 300 crore, as reported by the CGST Commissionerate. Harshvardhan Singh, Abhishek Singh's brother, along with the company’s Chief Financial Officer Paresh Thakkar, were also arrested after a thorough investigation.

In response to allegations made in September 2019 by Bipin Rathod, then chairman of MBL’s audit committee, Sebi initiated a detailed examination to check for any potential manipulation or misstatement in MBL's financial records.

Additionally, Sebi commissioned Chokshi & Chokshi LLP to perform a forensic audit on the company’s financial statements for the fiscal years 2018-19 and 2019-20. The auditors’ findings highlighted several discrepancies, including purchases from unregistered traders without actual transactions, inflated sales figures, dealings with entities that had not complied with GST filing requirements, sales to dubious entities, and overstated figures for impairments, receivables, and fixed assets.

Sebi’s findings indicated that the irregularities at MBL had commenced before the investigation period, revealing misuse of funds from a Qualified Institutional Placement (QIP) executed in September 2016, confirmed by a Sebi order issued on March 2, 2023.

MBL had also channelled these funds into non-convertible redeemable debentures. This action was supposed to be monitored by the audit committee, following the board of directors' decision as mandated by the Listing Obligations and Disclosure Requirements (LODR) norms. However, the audit committee failed to oversee the use of the issue proceeds adequately. MBL, along with Dhirendra, Babar, and Doshi as audit committee members, were found in violation of the LODR regulations.

Despite the company acknowledging timing discrepancies in recording the entries for QIP utilisation in the financial statements, Sebi's Adjudicating Officer, Sakkeena P V, dismissed the defences of Dhirendra and Abhishek Singh, noting significant breaches of the LODR rules and the Securities Contracts (Regulation) Act (SCRA).

Action taken

Sebi has barred Manpasand Beverages Ltd (MBL) and its top officials and directors from the securities markets for a period of three years from now and also imposed a total penalty of Rs 74 lakh for manipulating and mis-reporting the company's financial statements.

Apart from MBL, those restrained by Sebi are -- the promoter, chairman, managing director (CMD) Dhirendra Singh, promoter and executive director Abhishek Singh, and chief financial officer (CFO) Paresh Thakkar. Also, these four entities have been fined Rs 17 lakh each, which needs to be paid within a period of 45 days, Sebi said in its recently released 55-page order.

Dhirendra Singh, Abhishek Singh, and Paresh Thakkar have also been prohibited from holding the position of director or key managerial personnel in any listed public company or any intermediary registered with the regulator in any capacity for five years. They have also been restrained from accessing the securities market for three years.

The company's former independent directors -- Milind Babar and Chirag Doshi -- were fined Rs 2 lakh each and current independent directors -- Nishish Mobar and Bharti Naik were fined Rs 1 lakh each. Naik was a non-executive director at the relevant time. Sebi, in its order, had also found that MBL had deficiencies in internal controls and had published misleading financial statements for 2016-17 and 2017-18.