Bourses await powers to penalise promoters

Can only suspend non-compliant companies at present owing to a lack of jurisdictional clarity

A lack of clarity on the implementation of penal proceedings against promoters has emerged as a major block for exchanges looking to ensure regulatory compliance by companies and promoters. Stock exchanges are awaiting clarity from the regulator, Securities and Exchange Board of India (Sebi), over the use of powers such as imposing fines and freezing shares.

The bourses have again resorted to the unpopular tool of suspension of trading in case of non-compliance — a move said to hit minority investors more than the erring companies or promoters themselves. Sebi, in September, had directed the exchanges to impose fines as 'action of first resort' and only invoke suspension of trading in case of consecutive defaults.

“We have little option but to suspend trading, as still there is a lack of clarity on how we should go about imposing penalties on companies that don’t comply with listing requirements,” said an exchange official, requesting anonymity.

TO SUSPEND OR NOT TO SUSPEND?

• Due to non-compliance of listing agreement, exchanges suspend trading of shares
• The move affects non-promoter shareholders as it closes the exit route for them
• Sebi has asked exchanges to use suspension as a measure of last resort
• Regulator has suggested other measures such as fines, freezing of promoter shares, exit window
• Exchanges continue to suspend companies due to a lack of clarity on use of penal powers

Last week, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) together suspended about three dozen companies, which had failed to comply with various clauses of the listing agreement. The wealth of public investors locked due to the suspension of these companies was pegged at Rs 200 crore.

BSE and NSE spokespersons could not be reached for comments on whether they had officially written to Sebi on the matter. Suspension of trading has been a contentious issue, as it closes the exit route for public shareholders and does little damage to the promoters who run the affairs of the companies in question.

Taking cognizance of this, Sebi had recently prescribed a standard operating procedure (SOP) for  exchanges to deal with non-compliant companies. Besides putting in place a fine structure, the regulator had suggested measures such as freezing of promoter shares and shifting scrips to the trade-to-trade segment. It also asked the exchanges to provide for an ‘exit window’ to public shareholders before suspension.

Experts say suspension of trading is an unfriendly practice and exchanges should clarify with Sebi and move to the new process the regulator has put in place. In the past, public interest litigation has come from investor protection groups in high courts against stock exchanges and Sebi, alleging that they failed to protect investor interests by resorting to measures such as suspension of trading.

Exchanges over the years have suspended trading in about 1,000 companies, typically small in size, for non-compliance with clauses of the listing agreement. Estimates suggest thousands of small shareholders and investment worth several crores have been hit on account of suspension.

Last month, Sebi chairman U K Sinha had expressed displeasure over the high number of listed companies not complying with the disclosure requirements prescribed in the listing agreement.

According to Sebi data, there are about 1,100 companies that are non-compliant with requirements of clause 35 of the listing agreement and about 900 companies non-compliant with the requirement of corporate governance (Clause 49) of the listing agreement. The listing agreement is a contract between a stock exchange and a listed company. It has several clauses dealing with disclosure requirements, such as filing of results, shareholding data and corporate governance requirements that companies have to follow.