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Shell firms: SAT grants interim relief to J Kumar Infra, Prakash Industries

Trading is expected to resume in these two companies on Friday

Shrimi Choudhary  |  Mumbai 

SAT grants interim relief to J Kumar Infra, Prakash Industries

The (SAT) on Thursday granted interim relief to and by lifting trading restrictions imposed by the capital regulator, Securities and Exchange Board of India (Sebi).
 
Since Monday, trading has been halted in these two companies, along with 329 others, after they were moved to so-called Stage VI of graded surveillance measures - where trading is allowed only once a month - for being "suspected shell companies".
 
Sebi's action to abruptly halt trading in these companies has faced widespread criticism as it virtually froze the investments of millions of
 
Citing the move as a knee-jerk action, the appellate tribunal said, "It is apparent that passed the impugned order without any investigation. In the facts of these two appeals, we are prima facie of the opinion that the impugned communication issued by on the basis that the appellants are ‘suspected shell companies’ deserves to be stayed.” and had moved SAT on Wednesday, challenging Sebi's decision to classify them as "shell companies".  Trading is expected to resume in the two companies on Friday as the tribunal has directed the and the National Stock Exchange (NSE) to reverse Sebi's decision. SAT will resume hearing in the matter on September 4.
 
and also appeared before for a personal hearing on Thursday, where the regulator asked the companies to furnish some information.
 
During the hearing, SAT questioned on the urgency in issuing the impugned communication without even investigating the credentials and fundamentals of the companies.

SAT on order

  • Apparent that passed order without any investigation
  • There was no urgency in issuing MCA communication
  • BSE, directed to reverse orders against J Kumar Infra, Prakash Ind
  • Delay in disposal of representation by causing serious prejudice·
  • MCA letter merely required to investigate the matter
  • was required to take action in accordance with Act
  • Both the companies had moved SAT against the order on Aug 9
  • SAT to next hear case on Sept 4
 
Senior advocate Darius Khambata, representing Sebi, said the regulator had merely implemented the directions of the Ministry of Corporate Affairs, and it had carried out no independent investigation.
 
Khambata further said directives against the were administrative in nature and could not be challenged before SAT. He said the appeal by the two companies was not “maintainable”, and added that the appellant can file a writ petition in a civil court, instead.
 
On the other hand, J Kumar's counsel Janak Dwarkadas said the order was ex-facie, arbitrary, unreasonable and whimsical, and was issued without application of mind. He said could not have issued the communication without giving an opportunity of hearing to the appellants. He argued that in the present case, it was neither alleged that there was any abnormal price rise nor the financial health and fundamentals of the company had been looked into by before issuing the impugned communication. Agreed on the contention of companies’ counsels, SAT said was required to take action in accordance with the prescribed act and the regulations.
 
On Wednesday, initiated a probe into the 331 companies by directing stock exchanges to check the credentials and fundamentals of the firms. has also asked exchanges to furnish information on tax returns, bank balance, status of loan defaults and business model of these companies.
 
Sources said some of the companies had already started submitting the required documents to exchanges. The regulator is expected to lift the ban on these companies on a  case-by-case basis after verifying their credentials.
 
“Since the delay in disposal of the representation is causing serious prejudice to the appellants, we proceed to consider the plea of the appellants for grant of interim relief,” SAT noted.

counsel to SAT

  • Directives against the ‘shell’ companies are administrative in nature  
  • Sebi’ order can’t be challenged before SAT, hence is not ‘maintainable’
  • Appellant can file writ petition in civil court, instead
J Kumar Infra counsel to SAT
  • Sebi’s order was ex-facie, arbitrary, unreasonable, whimsical 
  • No opportunity given for personal hearing before passing order 
  • No allegations of abnormal price rise, concerns on financial health of the company

First Published: Fri, August 11 2017. 08:58 IST
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