Companies petition stock exchanges against SEBI’s ‘shell firm’ tag

Several companies today petitioned the stock exchanges against being tagged as ‘suspected shell companies’, a day after regulator SEBI asked the bourses to restrict trading in shares of 331 firms following a reference from the government.

Many of these companies tagged along their annual reports and other financials to press upon the exchanges that they are not shell companies and are in compliance with all regulations, while many were contemplating approaching SEBI directly or even file appeal with the Securities Appellate Tribunal, among other legal options.

SEBI had fired a bullet between the eyes of 331 listed entities suspected to be shell companies, on Monday. This is the regulator’s first such massive crackdown and markets responded in a predictable fashion, dumping the stocks. On Tuesday, Sensex fell 0.5 per cent, while Nifty was down 0.48 per cent.

The 331 firms comprise 7 per cent of the total listed entities, have a public float of Rs 12,000 crore, and some even have marquee investors like Rakesh Jhunjhunwala, besides mutual funds and FPIs.

Following SEBI’s order, the firms are restricted from regular trading with immediate effect, while their promoters cannot sell shares until further notice.

SEBI also asked bourses to verify the credentials, conduct forensic financial audit and de-list scrips if violations are found. Such firms cannot deal with any security on exchanges and their depository accounts will be frozen till they are de-listed.

“SEBI must have done the investigation before taking action. It is a good thing for stock markets and it would give a pause for investors amid frenzied buying,” Shriram Subramanian, founder of InGovern Research Service, a proxy advisory firm, told Express.

The move comes months after the Ministry of Finance warned of taking punitive action against erring firms. According to SEBI, trading in all the 331 listed securities is placed under Stage VI of the Graded Surveillance Measures (GSM), where trading is permitted once a month under the trade-to-trade category. Some of these firms had first been identified as shell companies by the Ministry of Corporate Affairs.

The term ‘shell company’ is not defined under the Companies Act but recently, Corporate Affairs Minister Arun Jaitley, had told the Lok Sabha that many such entities have been found to be indulging in large scale tax violations.

Contrary to general perception, shell companies are apparently being referenced here for those suspected to have indulged in abetment of tax evasion and money laundering activities, regulatory sources said.

But not all firms agree with SEBI’s decision and have refuted the basis of the classification. “Pincon has been a dividend-paying company and does not have any complaints pending pertaining to dividend payments or investor complaints,” said Pincon in a BSE filing. “We have six production units, and for liquor verticals, we pay government excise duties ranging in crores of rupees to run the business,” the company added.

“We are not a company which by any stretch of imagination can be termed as such and we are a healthy profit-making company having an annual turnover of Rs 2,400 crore and profit of Rs 78 crore during financial year 2016-17,” said Prakash Industries, adding that the company also has “over 52,000 shareholders and our scrip is actively traded in NSE and BSE current average daily volume is over one

million shares”.

In a 217-page filing to the exchanges, Tamil Nadu-based Lotus Eye Hospital and Institute Ltd said it was shocked to learn that the firm has been included in the list of shell companies and trading has been suspended.

“We have never received any kind of intimation as of date seeking for any documents or any kind of explanations in respect of non-compliance of statutory requirements.

“Our company is in full operation and has been complying with various requirements of different statutory authorities and regulators,” the filing said.

DB (International) Stock Brokers Ltd, said it is “not a shell company” and sought removal of its name from the list of 331 entities.

“Inclusion of our company’s name… has resulted in a significant negative impact on our reputation, business and our valued shareholders,” it said in a filing.

Other companies that came out with statements to deny any wrongdoing include Parsvnath Developers and J Kumar Infraprojects.

“We are shocked to find our company’s name amongst the list of suspected shell companies…,” Parsvnath Developers said, adding it is not a shell company by any “stretch of imagination”.

J Kumar Infraprojects said it is not a shell company and suspicion of the regulator is uncalled for.

“Our company’s compliance track record both with the exchanges and Registrar of Companies have been impeccable”.

SQS India BFSI Ltd has expressed shock that it has been placed under the surveillance list even as it has been complying with all the norms under Companies Act and SEBI regulations.

Link: New Indian Express – 9 Aug 2017