Join all hands to catch shell companies

The Securities and Exchange Board of India (Sebi) caught the market off-guard last week with an order to the stock exchanges. The regulator sent on a list of 331 entities suspected to be shell companies, shared by the ministry of corporate affairs (MCA). Some trade restrictions were imposed on these stocks, even as the exchanges were entrusted with the task of judging whether these companies had any substance or were only shells.
 
A couple of large companies became examples for experts who were critical of the Sebi move. These had a significant market capitalisation, decent turnover and were widely held, with institutional shareholders. Typically, Sebi actions against companies follow a procedure, involving investigation, issue of showcause notice and adjudication. Such processes usually take months and in some cases have taken years. This point was raised by the companies and the legal experts batting for them.
 
It is largely on the principle of natural justice, requiring someone  accused to be given an opportunity for being heard, that the affected companies have been able to get interim relief from the Securities Appellate Tribunal (SAT) .
 
Sebi’s position is that the order was not against the companies themselves. It was an administrative order to the exchanges and, therefore, not subject to appeal. This has not convinced the SAT in the initial cases, as the companies were able to establish that"by no stretch of imagination could Sebi consider the appellants as suspected shell companies, especially when the appellants do not satisfy any of the 10 criteria prescribed by the ministry of finance for considering a company to be a shell company."
 
After more companies started moving SAT, unofficial information suggesting some might have received money raised through illegal investment schemes has surfaced.  This has set the proverbial cat among the commentators, who have now done a Nitish Kumar-type somersault, to suddenly find merit in the Sebi order. Though these late leaks have managed to temper the criticism against the regulator, the danger that even actual shell companies might get away on the ‘natural justice’ argument is still present.
 
The move and the confusion that followed again strengthens the case for a unified regulator in the financial sector, a proposal allowed to rot. At least five agencies were involved in the order -- the income tax department, Serious Fraud Investigation Office, MCA, Sebi and the exchanges. Each of these often looks at a company like the proverbial four blind men looked at the elephant.  While the exchanges and market regulator did not look at the tax-related issues and generation and laundering of black money through illiquid stocks, the tax department did not look at things from the market manipulation and securities laws perspective.
 
Though the little coordination between agencies is a good start, the hasty execution threatens to turn it into an embarrassment. All these agencies should tune their internal systems and synchronise these with each other, to ensure such large operations are executed flawlessly. What is the use of months of surveillance and investigation if the suspects walk away even before proper scrutiny, due to procedural lapses?
 
Greater and more regular coordination should help the regulators pass tighter orders, that stand the test of SAT and the court above it.  It is a long way before the conch of closure blows on the war on shell companies.