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No respite for investors in vanishing firms

A study estimates that the total loss of investors' money in 1,325 vanishing firms could cross the Rs 1-lakh crore mark, or two per cent of the country's gross domestic product.

BS Srinivasalu Reddy | February 15, 2011 | Updated 18:06 IST

Lack of proper exit option is forcing several companies with negligible promoter holdings to languish without trading on the stock exchanges.

Worse still, promoters of a large number of such companies have already cashed out their stocks through the back door, mostly right under the nose of the regulators.

"Providing an exit option to these vanishing companies with high public shareholding could add to the Bombay Stock Exchange ( BSE) market cap and give shareholders of several such stocks a legal exit option," said Kishor Ostwal, chairman and managing director ( CMD), CNI Research, a listed equity research house.

In a study conducted a few months back on 789 of the total 1,325 vanishing companies for which data is available, CNI Research found that the market capitalisation of these companies on the date of suspension was Rs 60,538 crore. Of this, public money ( including that of retail investors) amounted to Rs 57,563 crore (over 95 per cent), and institutions, mostly government-led stood at Rs 145 crore while the rest, Rs 2,975 crore (4.91 per cent), was that of the promoters.

If the data of the remaining 536 vanishing companies is added, the total loss of investors' money could cross the Rs 1-lakh crore mark, or two per cent of the country's gross domestic product (GDP).

So, how does one define these vanishing firms? Typically, these are companies that had raised funds from the public and got listed but stopped operations and are not traceable at their registered offices. At most of these companies, the managing director or any of the whole- time directors also could not be traced. These companies have also stopped filing their half-yearly and quarterly returns with the stock exchanges or Registrar of Companies (RoC).

Most of these companies were floated by fly-by-night operators during 1994-96, who then went on to raise funds through public issues in their or benami names and later vanished from the scene. To avoid the recurrence of such problems, it was later made mandatory for companies to file the photographs of their promoters with the Securities and Exchange Board of India ( Sebi) before floating public offerings.

The BSE claims to have 7,792 stocks listed on it, making it the largest stock exchange in the world in terms of the number of listed companies. But according to punters only about 4,700 stocks are available for trading at present, with several companies being shifted to the Z-group for non-compliance of the listing agreement and some others being suspended as their managing directors and executive directors are untraceable.

Data compiled by CNI Research throws up 19 companies having public shareholding of over 99 per cent, that is, promoters have brought down their shareholding to almost zero level. Retail and institutional investors are stuck in such firms.

There were reports that the Union ministry of corporate affairs (MCA) is trying to expand the scope of exit for these companies, in the event of any of their non-executive directors being traced.

Earlier identification of only executive director was thought useful for tracking the use of funds raised by such companies from the public, as non-executive directors are not involved in day-to-day operations.

Courtesy: Mail Today 

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