Sebi imposes restrictions on 331 suspected shell firms: What will happen to them?

Aseem Thapliyal        Last Updated: August 11, 2017  | 14:27 IST
Sebi imposes restrictions on suspected 331 shell firms: What will happen to them?

In a surprise order which could have a long-term effect on Indian markets, market regulator Securities and Exchange Board of India (Sebi) on late Monday night asked bourses to act against 331 suspected shell companies that the ministry of corporate affairs has listed.

The ministry has already cancelled the registration of more than 1.62 lakh companies that have not been carrying out business activities for long.

The regulator ordered bourses to effectively freeze trading in 162 companies. Earlier, trading in the remaining 169 firms had already been suspended.

Shell companies are used as passage for tax evasion or tax avoidance without having any significant assets and operations. They are not defined under the Companies Act or Sebi Act.

Post the order, the Sensex closed 0.80% or 259.48 points lower at 32,014 points while the Nifty ended 78.85 points or 0.78% down at 9,978, capping a second day of declines.

The Nifty fell below the 10,000 level for the first time in two weeks. The last time the index fell below the 10,000 mark was July 27.

Why Sebi acted on these firms?

Though the Sebi order did not list what illegal activities the companies may have been engaged in, it seems that these firms were used as conduits for money laundering after the  government announced demonetisation last year.

The firms saw high flow of funds from non-listed shell companies, say reports.

What will happen to these companies now?

These entities would be subject to independent audit and if required, forensic audits could also be initiated to check their credentials. Post the audit process, if the firms are found fake and being used for the purpose of laundering money, then the proceedings for compulsory delisting will be started. The firms have the option to move Securities and Appellate Tribunal against the Sebi order.

What restrictions have been imposed on them?

The market regulator has asked bourses to keep the shares of these 331 firms in stage six of the Graded Surveillance Mechanism (GSM) with immediate effect. 

Besides, these entities would not be permitted to deal in any security on exchange platform and its holding in any depository account would be frozen till such delisting process is completed.

Trading in these firms has been suspended this month. They will be available for trading once a month (first Monday of the month).  

What are these companies saying?

Some of these companies have expressed shock at Sebi's order. The companies, their directors and shareholders were not given any chance to be heard before the order was passed, say market experts.  Section 11 (4) of Sebi Act 1992 states the regulator shall give an opportunity of hearing to the affected persons either before or after such orders are passed even as the act allows it to pass orders while the investigation is still pending.

While, Parsvnath Developers, SQS India BFSI Ltd and Pincoin Spirit denied any wrongdoing, J Kumar Infraprojects said it is not a shell company and suspicion of the regulator is uncalled for. Prakash Industries said directions issued by Sebi are totally devoid of merit and uncalled for.

What has been the impact on the market?

Market sentiment took a major hit due to the unexpected move of the market regulator. Investors and traders cut some of their more bullish bets yesterday. But trading volumes in the cash segment on the BSE and NSE rose 26 percent to Rs 35,653 crore yesterday compared to Monday.

The market regulator has capped the upward price movement at the level of the last-traded price for these stocks. Those who want to buy these stocks will have to make a deposit equal to double the value of the trade. This amount will be retained by the exchanges for five months.

Now, it would be interesting to see how far the stock prices of these firms fall in a day when their shares start trading next month. 

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