Exchanges bare fangs as first-stop regulators, nix Prabhat Dairy delisting

Sebi order directing the company to set aside Rs 1,292 crore throws light on key steps taken by both BSE and NSE, which led to a forensic audit at the company

Stock exchanges have shown their teeth as first-level regulators by refusing to greenlight the delisting plan of Prabhat Dairy, which has been hit by allegations of fraud. 

The order passed by markets regulator Securities and Exchange Board of India (Sebi) on Tuesday — directing the company to set aside Rs 1,292 crore — throws light on the crucial steps taken by the BSE and the NSE, which led to a forensic audit at the company known for its milk and dairy products.

Prompted by the markets regulator, the stock exchanges conducted a deep analysis of Prabhat Dairy’s public disclosures and submitted their examination report to Sebi. 

“The present case warrants a detailed scrutiny of the entire exercise done by Prabhat Dairy and therefore, Sebi may consider conducting a forensic audit of the company. The BSE shall not process the application of the company for voluntary delisting until it receives the go-ahead from Sebi,” the BSE said in a report. 

In a separate report submitted by the NSE, it said the details provided by Prabhat Dairy on utilisation of proceeds garnered from the sale of step-down subsidiary Sunfresh Agro were not satisfactory. 

“It appears that Prabhat Dairy is not able to reply to the utilisation of funds. Accordingly, it is proposed that the forensic audit of the company may be conducted,” the exchange proposed to Sebi.

In April 2019, Prabhat Dairy had sold its dairy business housed under Sunfresh Agro to Tirumala Milk Products, a wholly owned unit of French multinational Groupe Lactalis, for Rs 1,700 crore. Since this business generated a bulk of revenue, Prabhat Dairy told its public shareholders that it would distribute the sale proceeds by dividend or buyback. Instead, the promoters proposed to delist and announced a floor price at a discount to the market price.

“The proposed delisting offer price is Rs 63.77 per share. Promoters are required to pay approximately Rs 310.81 crore. This is lower than the Rs 872 crore lying in the escrow account for distribution to shareholders of the company,” the BSE highlighted in its examination report.

Experts say the stock exchanges could play a key role in raising the compliance standards at listed firms.

“Stock exchanges have always acted as an excellent agency when it comes to implanting laws on behalf of Sebi. They play a very important role in upholding the disclosure standards and spirit of the law,” said Gautham Srinivas, partner, Khaitan & Co.

In the past, Sebi has pushed exchanges to play the role of first-level regulator by seeking and analysing key information from corporates. Exchanges have also been given the authority to penalise companies if they fail to adhere to listing standards. 

J N Gupta, managing director, Stakeholder Empowerment Services, a proxy advisory firm, said, “Exchanges can play a proactive role. However, there are two problems. Exchanges get revenue from companies, so there is an inherent conflict of interest. Exchanges have the authority, but not the perception.”

Besides stock exchanges, proxy advisory firms, too, had red-flagged issues at Prabhat Dairy.