Explained: Brightcom's scam which prompted SEBI to slam it with a show-cause notice

India's economic growth has been described as a bright spot amidst the dark clouds of recession, but the country's success story is also blemished by cases of corporate fraud once in a while. Hindenburg's allegations of stock manipulation against Adani, came barely a week after startup GoMechanic admitted to overstating revenues to inflate valuation.

The latest Indian firm to be caught in the act is digital marketing firm Brightcom Group, which has been slammed by the Securities and Exchange Board of India.

Promoters face the heat

The Hyderabad-based firm has received a show cause notice and an interim order, directed against its Chairman and Managing Director Suresh Kumar Reddy, and three others.

SEBI has forbidden them from reducing their shareholding in Brightcom and instructed the firm to appoint an independent director, while the National Stock Exchange will monitor it.

As per the market regulator, Brightcom kept expenses off the books to make it look like it has been making higher profits.

How did the scam unfold?

Between FY19 and FY20, entries of more than Rs 1,280 crore were concealed in the account books of the company.

The loss of value of assets due to impairment worth Rs 868.30 crore was also hidden by Brightcom.

Without this manipulation of accounts, the profits of the ad-tech provider would've been a lot lower than what they appear.

During the span of the investigation, promoters of Brightcom decreased their holding from 40 per cent to 3.51 per cent.

This indicates that prices were inflated by the firm artificially, so that promoters can dump shares at a higher price to book undue gains.

How stocks changed hands

They also made a preferential allotment of shares worth Rs 836.38 crores to entities, of which four later became part of Brightcom's promoter group.

Although the allotment price was Rs 7.70 per unit, its actual price came down to Rs 3.70 per share after bonus issues.

The SEBI concluded that the promoters had increased their shareholding at a lower price, and sold their stocks at a price much higher.

The company which also misreported its shareholding pattern in 31 out of 34 quarters, is also required to undergo scrutiny of its statements between FY15 and FY22.