Days after the Securities and Exchange Board of India (Sebi) on August 7 asked stock exchanges to restrict trading in shares of 331 listed companies that were allegedly operating as “shell companies”, the Securities Appellate Tribunal (SAT) has stayed trading restrictions on eight of these companies after they approached the tribunal to seek reprieve terming the order as arbitrary. The tribunal’s order raises a question mark over the due diligence followed by the capital market regulator before passing the directive to stock exchanges. A close look at the financials of 162 actively traded companies at the BSE on the list shows that several companies have operational businesses and have been
reporting quarterly revenues and profits on a regular basis.
At least 11 companies on the list reported revenues of over Rs 150 crore each in the financial year ended March 2017. While all of them had market capitalisation in excess of Rs 200 crore as on August 7, all of these 11 companies, barring Parsvnath Developers, also announced a net profit of at least Rs 1 crore for the year ended March 2017. JKumar Infraprojects had announced a net profit of Rs 105 crore for the year ended March 2017, while Prakash Industries had a net profit of Rs 81 crore for the financial year and Pincon Spirit registered a profit of Rs 43 crore.
While Sebi’s decision to put some of these companies on the list of suspected “shell companies” and restrict trading on them has been turned down by the SAT, even a task force on shell companies, constituted under the co-chairmanship of revenue secretary Hasmukh Adhia and corporate affairs secretary Tapan Ray, is likely to seek an explanation from Sebi. A government official told The Indian Express that “due diligence” may not have been followed by Sebi in its order against the suspected “shell” companies and the task force may ask it on the specific triggers that prompted the markets regulator to take action against 331 listed entities suspected to be shell companies.
Though many are raising questions over the sudden Sebi action without differentiating the bad ones from the better ones, a government official said that if some well-run companies has also been grouped with others, they would eventually come out of it.
A finance ministry official said that the “regulator should not give prior notice to the companies suspect of wrongdoing, as this could alert them to set their house in order. The Sebi imposed initial restrictions to halt the entire process of converting black money into white through securities market”. While it may have caused temporary liquidity squeeze for some companies, it has had the desired effect on shell companies, the official said.
Even Sebi had, in the hearing of the petition filed by three companies in the SAT on August 10, told the tribunal that its action is not final and that it has not concluded that all the companies are “shell companies”. Sebi also said that it has taken only a first-time action against the suspected companies after the corporate affairs ministry shortlisted the firms.
What does the list throw up
The aforementioned 11 companies had an aggregate revenue of Rs 10,262 crore for the year ended March 2017 and a combined net profit of Rs 335 crore. Their combined market capitalisation stood at over Rs 8,000 crore as on August 7. The 8 companies that have already got reprieve from the SAT against the Sebi directive are JKumar Infraprojects, Prakash Industries, SQS BFSI, Kkalpana Industries, Pincon Spirit, Signet Industries, Parsvnath Developers and Kavit Industries. The other three companies that have reported high revenues and profits but still have been clubbed with suspected shell companies by the regulator are Gallantt Ispat, Gallantt Metal and Adhunik Industries. While the two Gallant group companies reported revenues of over Rs 400 crore each and net profit in excess of Rs 25 crore each in the financial year ended March 2016, Adhunik Industries reported a net profit of Rs 2.3 crore over revenues of Rs 374 crore for the same period. Other than the 11 companies that have market capitalisation of over Rs 200 crore and a net profit of Rs 1 crore, there is another company Cybermate Infotek which reported a net profit of Rs 2.3 crore on a revenue of Rs 53 crore for FY17.
The Sebi list, on the other hand, also has many companies that either show no revenue or high revenues and no profits for a series of 3 years or more. One of the companies in the list is Dwitiya Trading. While the company announced revenues of Rs 0.99 crore, Rs 0.75 crore and Rs 0.41 crore in FY17, FY16 and FY15, respectively, it announced net profits of Rs 0.06 crore, 0.01 crore and 0.03 crore for the respective three years. Appu Marketing and Manufacturing commands a market capitalisation of Rs 200 crore but announced revenues and net profit of Rs 0.1 crore and 0.17 crore respectively. GV Films had no revenue in FY17 and a loss of Rs 9.3 crore. Similarly, Goenka Business and Finance Ltd, which had a market capitalisation of Rs 109 crore, declared revenues between Rs 2 crore and Rs 3.2 crore in the past three years and net profits between Rs 0.06 crore and 0.5 crore in the three years.
Then there is a long list of companies that announced high revenues over several years but negligible profits or losses. The list includes companies such as Unisys Software, VB Industries and BLS Infotech, among others. Unisys Software, for instance, has announced revenues of over Rs 450 crore in each of the past three years. However, it has declared net profits of Rs (-)0.04 crore to Rs 0.8 crore in the three years. Similarly, VB Industries though announced revenues of Rs 121 crore and Rs 145 crore in the last two years, its net profits stood at only Rs 0.06 crore and Rs 0.3 crore.
While the Sebi action came after the corporate affairs ministry shortlisted the names of the suspected companies in February 2017, the government had said that there are about 15 lakh registered companies in India and only 6 lakh companies file their annual return, implying that “a large number of these companies may be indulging in financial irregularities”. On August 15, making his Independence Day speech, Prime Minister Narendra Modi said the government has cancelled registration of 1.75 lakh companies. Even the Minister of State for Corporate Affairs Arjun Ram Meghwal on August 1 had said that the ministry has removed 1,62,618 companies from the register of companies as of July 12. These companies were removed as they have not been carrying any business or operation for two immediately preceding financial years. Section 248(1) of the Companies Act, 2013, empowers the government to remove name of company from the register of companies.
While market experts say that the action must be taken against companies not doing any business, they have raised questions over Sebi’s idea of imposing trade restriction on companies and closing the exit option for investors. They have also raised concerns over the Sebi order to put all companies in one basket and hurting the investor sentiment.
“The regulator’s action does not seem justified and because of their haste in passing out an order without a thorough due diligence, several companies and large number of investors have been impacted,” said the chief executive officer of a large brokerage firm, who did not want to be named.