The sudden suspension in trading in more than 300 “shell companies” on a direction issued by the Securities and Exchange Board of India (SEBI) took the market by surprise on Tuesday with the mid-cap and small-cap segments bearing the maximum brunt.
While the benchmark Sensex fell 0.80%, or 259.48 points, to close at 32,014.19, the BSE SmallCap index slid 1.27%, or 205.17 points. The BSE MidCap index also lost 1.2%, or 187.12 points.
A circular issued by the stock exchanges on Monday said that the capital markets regulator — based on a letter from the Ministry of Corporate Affairs (MCA) — had identified 331 shell companies and that exchanges needed to place the listed entities under Stage VI of the Graded Surveillance Measure (GSM) with immediate effect.
Under the GSM framework, trading in such firms is allowed only once a month and any upward price movement is not permitted beyond the last traded price. Also, an additional surveillance deposit of 200% of the trade value is collected from the buyers that is retained with the exchanges for a period of five months.
Sandeep Parekh, Founder, Finsec Law Advisors said that the concept of shell company in itself cannot be used to penalise entities in the absence of any other violation of laws, regulations or circulars.
“One can expect either SEBI itself to take corrective action or operating companies to challenge it on different grounds... Companies could approach SEBI, stock exchanges, SAT (Securities Appellate Tribunal) or the high courts for relief,” he said, adding that penal action had been taken even before the most basic fact finding had been done.
J Kumar Infraprojects, a company mentioned in the list, said in a filing that it was not a shell company and had a work order book of ₹9,334.81 crore as on March 31.
“Our company’s compliance track record both with the exchanges and Registrar of Companies has been impeccable,” the company said in a statement. “We are seeking legal advice in the matter and we are approaching the regulator ie SEBI requesting it to recall its direction qua us. We shall co-operate with all the authorities for any verification by them.”
Corporate law experts said the sudden action by the regulator could lead to significant erosion in perception and valuation of the firms that had been listed.
“SEBI order has taken industry and investors by surprise,” said Rajesh Narain Gupta, Managing Partner, SNG & Partners. “Devil lies in the details so we need to deep dive on this order. It is not clear whether show cause or appropriate notice was given to these companies to justify whether these are actually shell companies or not.”
SEBI advised exchanges to appoint an independent auditor to audit such listed firms and if need be conduct a forensic audit.