A giant leap, but miles to go

Last week, the Securities and Exchange Board of India (Sebi) took an important and long overdue step in safeguarding the interests of investors in small and very small companies. Sebi has prescribed a Standard Operating Procedure (SOP) for stock exchanges to deal with non-compliant companies.

The regulator said, "It is now decided that the exchange in case of non-compliant companies would resort to several other measures such as imposition of fines, freezing of shares of the promoter and promoter group, transferring the trading in the shares of the company to separate category, etc, before suspending the shares of the company."

This move will prevent more companies from going into the "suspended" abyss. While delisting required that promoters bought back the shares outstanding from the minority, suspension did not come with any such liability. Suspension from trading, investor associations had long argued, played into the hands of the promoters who wanted to wriggle out of their obligations to the minority shareholders.

Once the company got suspended, the shareholder's exit route got shut and he was left holding shares worth nothing hoping that one day the company will comply with the exchange's conditions for revocation of suspension and return to trading. The promoter had better options. He could always float a new company, if not under his own name under the name of son, daughter or daughter-in-law, bring it to the stock market and raise crores of rupees and repeat the cycle.

The number of investors affected by this menace was over 10 million and amount of capital lost exceeded Rs 1 lakh crore, according to estimates provided in a writ petition filed before the Delhi High Court. Worse, according to the minutes of the 25th Sebi-Investors' Association meeting, one of the Mumbai-based exchanges could not find over 100 listed companies and directors at their given addresses.

"Considering all these, the step taken by Sebi is no doubt a major breakthrough. It has ensured that more companies are not added to the list," said Virendra Jain, president, Midas Touch Investors Association.

Midas Touch has filed a public interest suit where it has made Sebi, NSE and BSE as parties. Jain says that the Sebi move has taken care of the future but the past remains untouched.

In all, 2,048 companies on the BSE and NSE have not complied with the requirements of the listing agreement. A committee headed by then Sebi whole-time member M S Sahoo had recommended action against 6,000 promoters, 12,000 directors and some 2,000 compliance officers of these companies.

Three years on, not much has moved. Probably, nobody wants to open a Pandora's Box of numerous, never-ending litigation.

In addition to these, there are a further 816 companies in the regional stock exchanges which were suspended between April 2009 and February 2013, according to a statement by finance minister. The fate of investors in these exchanges is another sorry story in itself. Sebi has provided a framework for these bourses to shut down their operations. But while they are still alive, some measures have to be taken to bring them to compliance.

The regulator has provided "trade-to-trade" window to allow exit of non-promoters in the companies that are in line for suspension. This allows investors who want to exit the company to sell their shares. A similar window would be a god-send for investors languishing in companies already suspended.