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Sebi softens stand on shell companies, says action based on ministry's list

Hints at revoking ban if exchanges give favourable report

Shrimi Choudhary & Dilasha Seth  |  Mumbai 

Sebi softens stand as 'shell firms' move SAT
Illustration: Ajay Mohanty

Two days after suspending trading in 331 listed shell companies, the regulator, (Sebi), ordered stock exchanges to verify their credentials and fundamentals. In a letter to the exchanges on Wednesday, the hinted if a company’s business model appeared satisfactory, the trading ban could be revoked.

The move comes after faced widespread criticism from various quarters for classifying these entities as shell companies on Monday. The market value of at least 10 companies on the list is over Rs 200 crore each. Also 161 of these companies were active in trading, with over 2.7 million public shareholders. had directed exchanges to impose stringent trading curbs on these companies by putting them in the Stage VI of the Graded Surveillance Measure (GSM). The companies were identified by the Ministry of Corporate Affairs (MCA), with the help of the Serious Fraud Investigation Office (SFIO) and the income-tax (I-T) department.

Three of these companies — Prakash Industries, Parsvnath Developers, and J Kumar Infraprojects — also moved the (SAT) against Sebi’s order. They sought a stay on trading restrictions and claimed Sebi’s directives were “arbitrary and unreasonable”. During the hearing on Wednesday, the asked the to explain under which law or regulation the action had been taken. “Natural justice should have been followed before action was taken,” the panel observed. 

argued it had not concluded the companies are and the action had been taken based on a list.

Legal expert said should be careful while passing such orders, as it could have a wide impact. “Decisions that can have wide-ranging implications need to be carefully taken. There may be many companies on this list that are indeed shell companies, but that cannot justify mistreating even one well-functioning company,” said Somasekhar Sundaresan, an independent lawyer.

Further, the appellate asked counsel when the communication was received and whether it was brought to the notice of chairman or any member. The tribunal also asked what steps took after the provided it with information. Meanwhile, the counsel questioned maintainability of the appeal stating that it was an administrative order and hence, not admissible. argued it had not concluded the companies are and the action had been taken based on a list.
Conflict course

Companies to SAT
  • Three companies seek stay on order
  • They claim classification as “shell company” is arbitrary

to Sebi
  • Under what regulation was the action taken?
  • Natural justice should have been followed

to exchanges
  • Verify credentials and fundamentals of these companies
  • Seek auditor certificate from companies 
  • Check elaborate business model and tax returns
asked should give a hearing opportunity to all the three companies either before Thursday morning, failing which the tribunal will resume hearing in the matter.

The appellate also asked to respond on certain queries such as whether the officer who passed the impugned order had received the communication from the It has also asked the to file a reply on the due diligence done of the information received from the ministry.

The regulator’s surveillance department has directed stock exchanges to seek the auditor’s certificate from the companies, with a long list of disclosures. These include annual income-tax returns for three years and description of pending tax disputes, if any. Companies also need to provide status reports on compliance with the Companies Act and Sebi’s listing regulations. 

Besides, the companies will also have to give a framework of their business models — whether or not it was doing well. They would have to disclose loan defaults or if they had been declared as a non-performing asset (NPA). They would also need to furnish bank statements for the past one year, both for active or dormant accounts, as well as the annual returns of the past three years.

Bourses have been asked to verify the auditor’s certificates and the documents provided by the companies. in the letter, accessed by Business Standard, said the exchanges will have to give a hearing to the companies concerned and submit a report.

The also asked exchanges to submit the status report of the brokers and their respective clients (investors). has instructed exchanges to ask brokers to check the credentials of their clients (investors). “In case the credentials of the client is not found satisfactory then their unique client code (UCC) should be temporarily disabled by the exchanges,” it said in the letter. On the other hand, the government also indicated that some of the companies might soon resume trading. “We expect about a dozen companies might be allowed to resume trading within a week,” said a finance ministry official. Action against the identified companies was taken after a spike in trade was found during demonetisation, he added. “Many have been found to be violating the income-tax rules. These companies, however, will be given a chance to prove their position,” said the official. 

First Published: Thu, August 10 2017. 10:55 IST