Anatomy of a smallcap stock scam

The Enforcement Directorate recently seized the assets of several entities that it believes were used as vehicles to launder illicit money made from the illegal Mahadev Online betting app. Turns out that in 13 smallcap companies that are valued at between ₹63 crore and ₹3,300 crore, four of these entities hold at least a 1% stake, as per a review of share ownership by Mint.

One of these entities under investigation is the Dubai-headquartered Zenith Multi Trading DMCC, which is promoted by Hari Shankar Tibrewal, alleged kingpin of the Mahadev betting scandal.

The Dubai-based Tibrewal helped the promoters of Mahadev Online, Sourabh Chandrakar and Ravi Uppal, launder proceeds earned from the betting app into the Indian stock market, and holds stock worth ₹580 crore, the Enforcement Directorate said in a statement on 8 March.

Zenith Multi Trading has bought over 1% shares in five smallcap Indian companies—Gensol Engineering Ltd, Balu Forge Industries Ltd, Pritika Auto Industries, Paramount Communications, and Servotech Power Systems, show shareholdings in these companies reviewed by Mint.

Another fund in the ED’s crosshairs is the Kolkata-based Dream Achiever Consultancy Services Pvt. Ltd, owned by Tibrewala’s Indian aide Suraj Chokhani.

Dream Achiever has bought shares in BLB Ltd, LKP Finance Ltd, and Gogia Capital Services, according to a review of share ownership of the listed entities.

Mint could not ascertain the beneficiary owners of the two other entities—Brilliant Investment Consultants Pvt. Ltd, and Ecotek General Trading Llc—holding more than 1% stake in domestic smallcap companies.

Zenith Multi Trading DMCC, Dream Achiever Consultancy Services, Brilliant Investment Consultants Pvt. Ltd, and Ecotek General Trading Llc are among 13 entities whose assets the ED has seized. Their names surfaced in a statement related to a stake sale that fell apart last week.

BLB Ltd promoter Brij Rattan Bagri and his family had on 17 January agreed to sell their 36.84% stake in the Delhi-based company to Dream Achiever Consultancy Services, which already owned 8.45% in it. Consequently, an open offer was triggered, under which Dream Achiever Consultancy was to buy an additional 26% shares in BLB.

But on 8 March, Bagri’s plan to exit the company, founded by his father Babu Lal Bagri in 1965, for ₹43.81 crore appeared dashed.

“Please be informed that we received intimation from Dream Achiever Consultancy Services Private Limited (“Acquirer”) regarding an order issued by the Directorate of Enforcement, Government of India. This order, issued under section 17 (1-A) of the Prevention of Money Laundering Act, 2002, entails the freezing of the company’s property, including FPI investments, balances, equity shares, securities, F&O, and Demat Account,” Fast Track Finsec Pvt. Ltd, the merchant bankers to the BLB open offer, said in an emailed statement. 

“The order also prohibits the transfer of these assets without prior permission from the office of the Joint Director, Enforcement Directorate, Raipur Zonal Office,” it added.

Along with this communication was an exhibit detailing the names of the 13 entities whose assets the ED had seized.

Save for the investments made by the four firms in the Indian stock market Mint could not ascertain the investments of the remaining nine entities.

Brilliant Investment Consultants, one of the four firms, owned 2.58% in North Eastern Carrying Corp. as at 31 December. Ecotek General Trading owned 7.58% in Ok Play India Ltd and a 20.13% stake in Toyam Sports Ltd. Ecotek General Trading also owned 4.41% in Algoquant Fintech Ltd and a 1.14% stake in Trescon Ltd.

Of the 13 companies whose assets the ED has seized, 12 did not respond to Mint’s queries, including on whether they had any transactions with Tibrewal or Chokani or any of their funds.

A spokesperson for Servotech Power Systems said Zenith Multi Trading was a shareholder in the company and there were no other “business dealings or relationships between the two entities”.

“Servotech Power Systems Ltd. fully complies with all disclosure requirements and regulatory guidelines applicable to listed entities. The company does not exercise control over or have access to its shareholders’ business dealings or private transactions,” the spokesperson said, adding that operations at its plants were unaffected and the company’s capital expenditure plans and revenue targets remained unchanged.

This development coincides with the Securities and Exchange Board of India’s chairperson Madhabi Puri Buch warning of a bubble forming in the smallcap and midcap equities markets.

Investors appear jumpy following news of the ED’s asset seizure on 8 March.

Shares of Gensol Engineering, North Eastern Carrying Corporation, and Balu Forge Industries tumbled 15.3%, 14.6% and 10%, respectively, over two trading sessions at the end of market hours on Tuesday. Shares of Toyam Sports India, Paramount Communications, and Algoquant Fintech were down 9.8%, 9.7%, and 9.1%, respectively. 

The scrips of LKP Finance and Ok Play India were down 8.9% each, while shares of Servotech Power Systems were down 8.65%. Shares of BLB, Pritika Auto and Trescon had lost 3.9%, 3.7%, and 3%, respectively.

Gogia Capital Services, though, has been an outlier, with its shares up 20%. 

The Enforcement Directorate, which has been investigating the Mahadev Online Betting case since last year, said in a statement on 1 March said Tibrewal was an accomplice of the promoters of the Mahadev Online book, calling him a “hawala operator” who was “investing the betting proceeds in (the) Indian stock market by foreign portfolio investment route”.

A week later, the ED in a statement dated 8 March, said it had arrested Chokhani from Raipur on 3 March.

But this time the federal agency made a bigger revelation.

“The searches in Kolkata also revealed that Hari Shankar Tibrewal was also involved in the manipulation of the stock market in collusion with the promoters of the listed companies,” the Enforcement Directorate said. “Hari Shankar Tibrewal, using his immense capital, used to create temporary fluctuations in share prices, driving them upwards, and then withdraw funds once the prices reached a desirable level.” 

Mint could not independently ascertain which promoters colluded with Tibrewal to manipulate the share prices of their companies. 

“March is seasonally a month of selling pressure for stocks as margin funding books need to be balanced by fiscal year-end,” said Rajesh Baheti, managing director of Crosseas Capital Services, a brokerage. “Coupled with regulatory concerns to rein in froth in micros and smalls and action by ED on proceeds of crime being channelled into certain stock counters you have the makings of a mini storm.”

For now, information about Tibrewal (who also spells his name as Tibrewala) is scarce. Chokhani, 44, is a resident of Kolkata, according to the Enforcement Directorate’s filing made before a court in Raipur.