A recent order from market regulator SEBI brought to a halt trading in more than 170 actively traded stocks on the stock exchanges. These firms formed part of a larger group of 331 ‘shell’ companies whose names the Ministry of Corporate Affairs (MCA) shared with the regulator for initiating action.
The order issued by the Securities and Exchange Board of India(SEBI) last week put at risk investor wealth amounting to almost Rs 13,000 crore.
- There are seven companies that reported a net profit of more than Rs 20 crore in the financial year ended March 31, 2017.
- One of them –J Kumar Infraprojects registered a profit of Rs 105.51 crore in FY 17.
- There are 25 entities that reported a total income of more than Rs 100 crore in FY 17 with Prakash Industries, K kalpana Industries, J Kumar Infraprojects and Pincon Spirit reporting incomes of between Rs 1,400 crore and Rs 2,500 crore.
- Eight entities, including the biggest three ‘shell companies’ , have already managed to obtain a stay on the trading restrictions by way of interim relief from the Securities Appellate Tribunal (SAT), that observed in clear terms that the capital market watchdog passed the diktat without an iota of investigation.
- Many companies may not appear as shell firms purely based on numbers, the list prepared by MCA was based on inputs received from various agencies, including the Income
- The challenge would be to delist those really non-operational companies or to penalise the brain behind them.
- Stock exchanges have already asked their member brokers to verify if any of the unlisted entities, that were part of the MCA list, were registered as their clients.
- The brokers will have to verify the credentials of such entities and submit a report to the exchanges by August 31.
- A lot of companies, directors, and promoters are going to go to SAT as this order will create ineligibility for many other things such as directorships in other companies and fund raising.
- The capital market regulator has begun hearing the companies on an individual basis, the proceeding and an order –even in the form of an interim relief-might take time due to the sheer number of companies and the lengthy verification process.
- The order assumes significance as the government, in April, had said that during the last three financial year, i.e from 2013-14 to 2015-16, investigations by the Income Tax department led to the detection of more than 1,155 shell companies used as conduits by more than 22,000 beneficiaries.
- The amount involved in non-genuine transactions by such beneficiaries was more than Rs 13,300crore.
- On Tuesday- a day after the diktat-the BSE Mid Cap and BSE Small Cap indices lost more than 1% each even as the benchmark Sensex declined by 0.8%.
- Well known stocks that made to the MCA list were locked at the lower circuit level as it investors frantically tried to offload their positions as trading restrictions were being imposed.
- The restrictions include allowing the shares to be the traded only once a month and not allowing any upward price movement beyond the last traded price.
- SEBI has advised the exchanges to appoint an independent auditor to audit such listed firms
- Conduct a forensic audit to verify the business credential of such fims.