On August 7, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) issued circulars notifying that capital markets regulator Securities and Exchange Board of India (SEBI) had forwarded them a list of 331 ‘shell companies’ as identified by the Ministry of Corporate Affairs (MCA) and advised them to take a number of actions against the notified listed companies.
The circulars said that trading in all such listed securities will be placed in Stage VI of Graded Surveillance Measures with immediate effect. Trading in these securities will be permitted once a month.
Besides, stock exchanges will initiate a process of verifying the credentials or fundamentals of such companies by conducting an independent audit and forensic audit, if necessary.
In case the stock exchanges do not find appropriate credentials or fundamentals, they will initiate proceedings for compulsory delisting of those companies.
In addition, the promoters and directors will not be allowed to transact in the securities of their companies, except for buying of the securities, until the investigation by stock exchanges is completed. Also, the shares held by them will not be allowed to be transferred by depositaries until the investigation is completed.
The circulars raise several concerns.
Contrary to some media reports, it is not SEBI that has ‘banned’ trading in these companies. The letter clearly states that it is the MCA which has forwarded SEBI the list of these 331 shell companies. SEBI, on its part, has just forwarded the list to the stock exchanges ‘advising’ them to do their own independent investigations on the same.
It is unusual that SEBI has just forwarded the list to the stock exchanges without stating whether it has done its own investigation on the veracity of the claim made by the MCA. In the absence of any such information in the circular, which has SEBI’s letter to exchanges, it can also be assumed that SEBI has not done any investigation on its own.
The letter by SEBI does not disclose any rationale or justification on what basis the MCA has classified these companies as ‘shell companies’. This has made matters confusing for stakeholders of the concerned companies, including their minority shareholders. The least that could have been done for transparency in communication was to disclose the criteria or event on the basis of which these companies were determined to be ‘shell companies’.
Some of the companies in the list includes names such as SQS India BFSI, J. Kumar Infraprojects, Parsvnath Developers, etc., which have operating businesses and revenues. It is not clear as to on what basis the MCA has classified these companies as ‘shell companies’. By prohibiting regular trading, it is the minority shareholders of these companies that will be affected the most.
There is no separate circular(s) on the above notification by either SEBI or the MCA. This has made matters more opaque and secretive than transparent.
It seems to appear that SEBI, through this letter, has committed what is known in statistics as Type-1 and Type-2 errors. Many companies that seem to be genuine have found their names on this list while there are many other suspect companies which are not at all mentioned here.
The biggest worry regarding this letter is that SEBI and the MCA have not provided any scope for the companies to present their defence as to why they should not be classified as shell companies. The companies, their directors and shareholders have not been provided any channel(s) to be heard out in this case. This is unfair to the companies and especially to their minority shareholders.
SEBI, as the regulatory body of listed entities in India, champions good corporate governance practices that include transparency and fairness by the companies. However, in this case, SEBI itself has failed on both these fronts.
First, by not disclosing the criteria of qualifying these 331 entities as ‘shell companies’ and by not stating whether it has done its own due-diligence or investigation on these companies, it has failed to be transparent.
Second, by advising stock exchanges to immediately restrict regular trading in the securities before even initiating an investigation, and by not providing any opportunity to the concerned companies to present their defence, SEBI has been unfair to these companies and their minority shareholders.
We sincerely hope SEBI to come up with a circular or notification that provides full justification and greater disclosures on the issues.
Shriram Subramanian is the founder and managing director of proxy advisory firm InGovern Research Services.