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Sebi orders forensic audit of 2 suspected shell firms

Besides audit, Sebi also barred Kavit's promoters and directors from selling the company shares

Press Trust of India  |  New Delhi 

Sebi
The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai (Photo: Reuters)

Stepping up its crackdown on suspected shell companies, market regulator has ordered of two listed firms -- and -- even as it eased some trading curbs on their

In case of GV Films, the regulator said the "balance sheet is disproportionate to the profit and loss of the company" which warrants an independent audit of its and liability, even as "there appears to be no prima facie evidence of misuse of the books of the company".


Regarding Kavit Industries, said there is prima facie evidence of misrepresentations by the company and violation of listing norms, as also about misuse of and books of accounts.

Stating that the company's directors and top management have failed to discharge their fiduciary responsibilities, the regulator said they are "prima facie liable for action by and should not be permitted to exit the company at the cost of innocent shareholders".

Besides ordering a forensic audit, also barred Kavit's promoters and directors from selling the company shares, though they can purchase the scrips.

Kavit and GV Films, where trading would now be allowed with applicable and in trade-to-category, are among the firms against whom initiated action last month, by ordering trading restrictions, following receipt of a list of 331 "suspected shell companies" from the government.

The ordered restrictions -- allowing only once a month and that too for only buy transactions with a 200 per cent security deposit -- were revoked in some cases following appeals filed by them with the Securities Appellate Tribunal, but was asked to continue with its probe and pass its orders expeditiously.

Continuing with its probe, has now passed interim directions in case of and Kavit Industries, while more such orders are expected for several others.

received the list from the Ministry of Corporate Affairs (MCA) on June 9, wherein it was asked to initiate necessary action under its regulations. The MCA also shared with a letter from Serious Fraud Investigation Office (SFIO), containing the database of along with their inputs.

found that the identified as by SFIO and MCA were potentially involved in misrepresentation including of their financials and business in violation of listing regulations.

Besides, was of the view that they were possibly misusing the books of accounts and of the including by facilitating "accommodation entries to the detriment of minority shareholders", thus reneging on the fiduciary responsibility cast on the board, controlling and the key management personnel.

Accordingly, took "pre-emptive interim measures" on August 7 by placing trading restrictions on promoters and directors of the listed shell companies, including and GV Films, so that they do not exit the firms.

The trading restrictions ensured that trading in those was not suspended, but allowed under strict monitoring so that the investors could take informed investment decisions till and the exchanges completed their detailed probes, the regulator said in separate orders on the two firms.

While the exchanges initiated the action, as suggested by Sebi, on August 7 itself, the regulator further on August 9 asked the bourses to submit a report after seeking auditor's certificate from all such companies, providing the status of the companies' compliance requirements with the Act and with listing regulations to ascertain whether they were 'going concern' and what was the business model.

While some firms approached the SAT against being tagged as "shell companies", the regulator was also asked to expedite its probe and pass necessary orders after hearing them out.

After looking into the submissions made by the company and also the report submitted by BSE, Sebi's Whole Time Member Madhabi Puri Buch said in her order on that the company has not recovered any interest on certain loans which was "given at specific request and friendly guarantee by some common business friend".

Also, the bank statements showed transactions that did not appear to be in the normal course of business and raised serious questions given the previous case of misuse of

Besides, the company disclosed a sudden spurt in and receivables for 2016-17, which said "prima facie raises doubt on the genuineness of these transactions".

also suspected "misrepresentation" by the company after it observed discrepancies in investment figures disclosed by the company in its annual reports and in its submissions before the regulator.

Stating that a detailed examination needs to be undertaken to unearth the entire extent of violations, Buch directed the to appoint an independent auditor to conduct a of for checking credentials and financials of the company.

A similar order was passed by Buch in case of and both the have also been asked to submit their replies or objections to the interim directions within 21 days.

In case of GV Films, has revoked the restriction on transfer of held by the promoters and directors.

After looking into submissions made by against being tagged as a shell company and the report on it, said the company did not have any "substantial business model in terms of and profit".

GV Films' standalone stood at Rs 5.68 crore in FY15, fell to Rs 3.36 crore in FY16 and further to nil in FY17, said, while observing that it had no other stream to support of about Rs 9 crore and was incurring losses year after year.

Besides, the company made in of a subsidiary company to the tune of Rs 15.05 crore even as its networth was getting eroded over years.

"The financials of the company is dominated by current liabilities of Rs 96.87 crore against which total assets of Rs 118.73 crore are shown which are disproportionate to the and of the company.

"Thus in the interest of the shareholders, the true status of these assets needs to be verified. However, there is no prima facie evidence of misrepresentation of the financials of the company," said.

Under Scanner
  • has ordered of two listed firms — and GV Films
  • said GV Films'balance sheet is disproportionate to the profit and loss of 
  • Regarding Kavit Industries, said there is prima facie evidence of misrepresentations by the company and violation of listing norms

First Published: Wed, September 06 2017. 02:09 IST
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