The Securities and Exchange Board of India (Sebi) directed stock exchanges to take action against 331 listed firms suspected to be shell companies as per the Ministry of Corporate Affairs. The regulator in a August 7 circular to stock exchanges said these companies will not be allowed to trade this month. Of the 331 firms, 162 are actively traded and the rest have already been suspended. According to the Sebi circular, shares of these 331 companies will be kept in stage six of the Graded Surveillance Measures (GSM) with immediate effect. These companies would also be subject to independent audit and also a forensic audit to examine their financials. “Under the stage VI of GSM framework, trading in these identified securities shall be permitted only once a month under trade to trade category. Further, any upward price movement in these securities shall not be permitted beyond the last traded price and additional surveillance deposit of 200 per cent of trade value shall be collected from the buyers which shall be retained with exchanges for a period for five months,” said the Sebi circular.
After the completion of the audits, if the exchanges do not find evidence that these companies indeed exist, they would be delisted. The companies will not be permitted to deal in any security on exchange platform and its holding in any depository account will be frozen till the delisting process is completed. A majority of the 331 companies are allegedly facing probe for alleged tax evasion and corporate frauds and have been referred by the Income Tax Department and Serious Fraud Investigation Office (SFIO) to the corporate affairs ministry and Sebi for further action. A large number of these firms are from West Bengal. Some of the prominent companies identified by Sebi include Parsvnath Developers, J Kumar Infraprojects, Adhunik Industries, Rei Agro, Birla Cotsyn, Zenith Birla, Winsome Diamonds and Jewellery among others.
Both REI Agro and Winsome Diamonds have been named as wilful defaulters by lenders. REI Agro owes about Rs 5,200 crore to Indian banks whereas Winsome Diamonds owes about Rs 4,000 crore to banks. “The existing laws do not define shell companies. Typically, companies which are operational are not shell companies and even having a shell company is not illegal. The larger point is that Sebi has not specified if these companies have violated any law, manipulated shares or have been found guilty of evading long term capital gains tax. The Sebi circular is in violation of principles of natural justice as it has not specified the violation for which the companies are being punished for,” said Sandeep Parekh, managing partner of Finsec Law Advisors and a former executive director of Sebi.
On Monday, a number of firms named in the list said they were not shell companies and accused Sebi of tarnishing their image. “We are not a shell company by any stretch of imagination … The directions issued by Sebi in terms of the letter under reference are completely uncalled for and is without any basis. We have never indulged in any malpractices in the stock market,” said Parsvnath Developers in a statement. J Kumar Infraprojects said it is not a shell company and suspicion of the regulator is uncalled for. “Our company’s compliance track record both with the exchanges and Registrar of Companies have been impeccable”.
The company said that majority of its clients consist of government authorities and listed out Delhi Metro, Mumbai Metro and JNPT Port connectivity as some of the projects underway. Prakash Industries said that directions issued by Sebi are “totally devoid of merit and uncalled for. Besides, there has never been a occasion when our company has indulged in any kind of malpractices in stock market”. SQS India BFSI Ltd has expressed shock that it has been placed under the surveillance list even as it has been complying with all the norms under Companies Act and Sebi regulations. “… we would provide all the necessary details and extend all assistance to cooperate with the authorities and get the matter resolved quickly,” the company said. As part of efforts to curb the black money menace, the Ministry of Corporate Affairs has already cancelled the registration of more than 1.62 lakh companies that have not been carrying out business activities for long.