A stock may fall because markets are weak or has been bought at a bad elevated price. But in many cases, investor wealth is destroyed because the company itself is hollowing out value. This is done through suspect fund flows, inflated profits, delayed disclosures, promoter-linked transactions or trading patterns that make prices look more genuine than they are. In stock markets, volatility is the risk investors can see. But corporate governance failure is the risk they often cannot see.

Corporate governance simply means how honestly and responsibly a company is run; lapses occur when those in control use weak disclosures, poor oversight or unfair transactions to benefit insiders at the cost of other shareholders.

An analysis of last 12 months’ SEBI orders, which run into over 500 pages (all combined), shows that these are not always random lapses. They often follow repeatable patterns. Money is raised but not used as promised. Profits are made to look better than they are. Assets are moved at questionable valuations. Stock prices rise even when business fundamentals deteriorate.

Such actions can play out over months or years. By the time the regulator steps in, investors may already have paid the price. The useful question, therefore, is not just what went wrong in these cases, but what investors could have watched for earlier.

Here are five governance traps, and the warning signs they leave behind.

Money without actual cash

One typical pattern involves capital appearing to be created without a corresponding inflow of funds into the business. It is like showing a bank deposit by moving the same ₹100 through several accounts and calling each movement fresh money.

Between December 2, 2024, and January 16, 2025, the share price of Pacheli Industrial Finance moved from ₹21.02 to ₹78.20, a rise of 372 per cent in just over a month. The stock was hitting the 5 per cent upper circuit every day from December 9, 2024. Its market capitalisation rose from about ₹40 crore to over ₹4,000 crore in eight months, despite negligible revenues in the previous three financial years. Its P/E ratio moved above 4 lakh!

SEBI stepped in after internal alerts. Pacheli had reported loans of about ₹850 crore from six entities. These loans were later converted into equity, resulting in the issuance of over 51 crore shares and giving the allottees control of nearly 99 per cent of the company. At first glance, this looked like a normal financial restructuring.

However, SEBI observed that in Pacheli, the funds moved in a loop. Money was received by the company, transferred to other entities and subsequently returned to the original lenders, often within short timeframes. Based on this, SEBI noted that the transactions raised questions about whether the company had received actual consideration for the shares issued.

This practice is commonly referred to as round-tripping. In plain English, money came in, went out and came back to the same people. The governance concern goes beyond disclosure. It points to weak oversight, where transactions may comply in form but lack clear economic substance.

What happened to Pacheli, you ask? It now has a different company name, ‘Grand Oak Canyons Distillery’ and m-cap has fallen to ₹1,600 crore, more than half of it at peak level.

Money routed out

A second pattern involves money being raised for stated business purposes and then routed through layers of entities.

In the much-publicised Gensol Engineering case, SEBI looked into the company pursuant to receipt of a complaint in June 2024. The regulator examined loans of ₹663.89 crore taken from IREDA and PFC for procuring 6,400 electric vehicles (EVs). Under the loan terms, the solar EPC player turned EV lessor and manufacturer Gensol also had to bring in a 20 per cent equity or margin contribution, taking the total expected deployment to ₹829.86 crore. Against this, the company procured 4,704 EVs worth ₹567.73 crore, leaving a gap of ₹262.13 crore, according to SEBI. The order also noted that Gensol had transferred ₹775 crore to EV supplier Go-Auto, which was ₹207.27 crore more than the value of vehicles delivered. SEBI observed that funds were routed through the supplier and allegedly moved to promoter (Jaggi brothers)-linked entities, with some end-uses appearing personal in nature including purchase of high-end real estate. Red flags on the company’s financial position could be seen looking at negative free cash flows, rising promoter share pledges, and resignation of CFO just after credit rating fiasco, and these were highlighted by a March 2025 bl.portfolio piece.

SME IPOs also seem to be a fertile ground for such lapses. Take a look at the June-July 2023public issue of IT products and networking solutions provider Synoptics Technologies. Here, the regulator was actually forced to step in after receipt of alleged irregularities in the bidding process. In this case, over 35 per cent of the IPO proceeds was moved out of escrow accounts a mere 24 hours before listing and trading approval. The transfers were described as issue-related expenses, though the amount was far higher than what had been disclosed in the prospectus. SEBI also found that the bank accounts receiving funds did not match the entities named in the agreements.

Since this issue’s Lead Manager was First Overseas Capital (FOCL), the regulator initiated examination into utilisation of funds raised by various companies through IPO in the SME segment where FOCL handled the IPO assignments.

And voila, a simpler version of this modus operandi was seen in the case of yet another FOCL-handled SME IPO in March 2023 of Nirman Agri Genetics, which was involved in the business of agriculture hybrid seeds, crop protection solution, pesticides. In the case of this three-year-old company, SEBI observed that nearly 93 per cent of the proceeds was transferred to entities that were either not found at their stated addresses or had questionable credentials. Site visits raised doubts about their business activity, and SEBI noted concerns around documents used to justify some transactions. Large payments were also followed by cash withdrawals, with explanations such as payments to farmers, which SEBI questioned.

In such cases, the governance concern is the possible misuse of public or borrowed funds, inadequate disclosure of related-party transactions and weak oversight.

For investors, warning signs include large fund-raising without visible asset creation, payments to unfamiliar entities and high-value transactions that do not match the company’s scale of operations.

Inflated profits

A third pattern involves how financial performance is presented. This is not necessarily by moving money, but by changing how gains, losses and expenses appear in reported numbers. It is like keeping expenses out of the monthly budget to make household savings look higher!

In the case of ad-tech firm Brightcom Group, SEBI — post receipt of certain complaints — found that profits were overstated by over ₹1,200 crore across two years. One key issue was the classification of large impairment losses under “other comprehensive income” instead of the profit and loss account. Put simply, these losses did not reduce the headline profit figure in the way they should have.

SEBI also found issues with the capitalisation of research and development costs, where certain expenses were treated as assets rather than being recognised as expenses.

Alongside this, SEBI flagged repeated disclosure issues, including incorrect shareholding patterns across several quarters and making misleading announcement.

Elitecon International, involved in manufacturing and trading cigarettes, smoking mixtures, and sheesha, offers a related disclosure pattern. Post complaints related to financial statement irregularities and price/volume manipulation in the scrip, SEBI did an examination. It observed delays in disclosure of GST show-cause notices totalling ₹408.65 crore, around 22 times the company’s average standalone net profit. These adverse disclosures were followed closely by positive announcements such as acquisitions and fund-raising plans (up to ₹300-crore QIP). This sequence of events appeared strategically timed to neutralise the negative impact of the tax disclosure.

The company had reported exceptional financial figures for the September 2025 quarter, with revenue increasing 6.38 times (from ₹79.13 crore to ₹504.90 crore) and net profit growing 2.28 times to ₹20.2 crore on a standalone basis. The governance concern here is two-fold: Whether financial statements present a true and fair view, and whether disclosures give investors timely and balanced information.

For investors, warning signs include large adjustments outside profit numbers, repeated inconsistencies in disclosures and reported growth that does not match operational indicators such as capacity, output, cash flows etc.

Assets sold below value

A fourth pattern involves possible transfer of value from a listed company to promoter-linked entities through transactions that appear compliant in form.

In the case of Par Drugs and Chemicals, the company proposed selling its core profit-making business to a promoter-linked entity. SEBI observed that the valuation was based largely on physical assets and did not adequately factor in elements such as goodwill, brand, employees, technical know-how and future earnings. The proposed valuation for the slump sale was ₹93-95 crore, while independent valuation came up with a figure of ₹387 crore. The proposed transaction had already resulted in erosion of around 70 per cent of the stock value of the company since the decision was made public, with m-cap dropping from over ₹400 crore in December 2024 to ₹140 crore by September 2025.

A simple way to understand this — a running business is not worth only its land, machinery and equipment. If it generates steady profits, its earning ability also has value. Ignoring that can lead to undervaluation.

SEBI noted that the valuation process did not properly capture the business as a going concern. It also observed that shareholders were not given adequate access to supporting information, and that a stated fairness opinion could not be produced.

The governance concern is whether minority shareholders had enough information to judge if the transaction was fair.

For investors, warning signs include sale of core assets to promoter-linked entities, valuations based mainly on assets rather than earnings and limited access to valuation reports.

Manufactured price discovery

A fifth pattern involves the use of capital structures and coordinated trading to push up stock prices.

In the case of RRP Semiconductor, SEBI observed that the company’s share price rose from merely ₹15 in April 2024 to over ₹10,800 by October 2025, despite weak financials. The company (earlier known as G D Trading and Agencies) shot to prominence in April 2024 when its then board approved proposals to insert a new object clause relating to the manufacturing, design and development of semiconductors etc. into the Memorandum of Association and to change its name.

Many of us would have seen social media posts about this stock’s over 70,000 per cent stratospheric price jump or received WhatsApp forwards, stating that this is purportedly the next ‘Indian Nvidia’ where one unnamed celebrity cricketer may be an investor etc.

Here is the important part. SEBI noted that RRP Semiconductor issued 1.35 crore shares at ₹12 through a preferential allotment. It also observed that one key individual had financed multiple allottees, raising concerns that control may have been concentrated while appearing dispersed.

A small number of shares were then distributed in very small lots across several connected entities. SEBI observed that some of these entities placed buy orders at upper-circuit levels — the maximum price allowed for the day — contributing to the price rise. In fact, the price of the scrip increased exponentially from ₹185 to over ₹10,000 within a short span of less than 10 months.

As the price rose, public shareholders increased sharply (22x), suggesting that retail investors entered the stock during the inflated phase.

The governance concern here is the possible misuse of preferential allotments, opaque ownership structures and trading patterns that may distort price discovery.

For investors, warning signs include sharp price-rises without improvement in fundamentals, sudden increase in public shareholders and repeated upper-circuit trading in thinly-traded stocks. Retail investors can track concentration signals through shareholding patterns, bulk/block deal disclosures, insider-trading disclosures and SAST filings, especially when the same entities repeatedly appear as acquirers/sellers or cross disclosure thresholds.

Key takeaways

Across these cases and more, the methods differ, but the underlying structure shows clear similarities. The objective is always the same: Separating investors from their money.

Typically, money is first created, raised or presented by those running companies in a certain way. It is then either routed through layers, reflected differently in financial statements, or disclosed in a manner that shapes perception. In many instances, this is followed by trading activity or valuation changes that allow promoters, insiders and others involved in the scheme to benefit in a big way.

These are not isolated lapses. They are often layered systems where multiple elements—capital flows, disclosures, accounting and market activity—interact with each other. It’s almost like ballet, but with your money. 

For investors, the challenge is not to track every regulation, but to assess whether key elements are aligned. Does the money raised translate into assets or business growth? Do reported numbers match operational reality? Are disclosures timely and consistent? Does promoter behaviour align with what is being communicated?

When these elements begin to diverge, the risk may extend beyond normal market volatility.

Unlike price movements, which are visible and immediate, governance-related risks tend to build gradually. In some cases, prices may even rise in the interim, creating a misleading sense of comfort.

But when underlying issues surface, the correction can be sharp and lasting.

Recognising these patterns early does not prove wrongdoing. But it gives investors a chance to reduce exposure, demand answers, or exit before concerns become impossible to ignore.

Bottom line - always invest only in businesses you can understand and not based on what excites you or hearsay. In the ocean called markets, there are numerous sharks. The onus is on you to surf in safer waters.

Published on May 2, 2026