Sebi ban on shell companies: You should be seriously worried

If you hold shares in any of the suspected shell companies that have been banned from trade following the Sebi order on Monday, you have a genuine reason to worry – at least for now.

On Monday, market regulator Sebi, directed the stock exchanges to ban trading in shares of 331 suspected shell companies and placed them under a graded surveillance measure (GSM) stage VI, where trading in the security is allowed only once a month with “surveillance deposit” of three times the trade value.

According to reports, mutual funds and investors collectively own shares worth nearly Rs 9,000 crore in these entities, with at least five companies commanding a market capitalisation (market-cap) of Rs 500 crore each. Some of the prominent ones among those banned include J Kumar Infraprojects, Parsvnath Developers, Prakash Industries, SQS India BFSI, Gallant Ispat, Adhunik Industries and Assam Company.

Also Read: Sebi bans trade in suspected shell companies. Here is the full list

Though experts welcome the move to ban shell companies and protect investor wealth, they feel the order will prove to be particularly harsh on companies that eventually get a clean chit from the regulator post investigation.

“Sebi order has taken industry and investors by surprise and lead to erosion of serious wealth. If some of the companies are found to be not shell companies, this order shall still be a death knell on their perception and valuation,” says Rajesh Narain Gupta, managing partner, SNG & Partners – a law firm.

Also Read: Sebi widens default disclosure rule

“That said, the devil lies in details so we need to a 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. Some of the names appear to be good names protection of consumer interest is paramount, however, balance needs to be explored between protection and logical interference,” Gupta adds.

Also Read: Sebi whip on 331 shell firms clouds market, infra and realty worst hit

Analysts say those who hold shares in these 331 companies are left with little choice – at least for now. While critically evaluating Sebi’s move, most people have missed the fact that there are only a few companies where the market regulator could have gone wrong, they say.

By definition, a shell company is a non-trading company used as a vehicle for various financial manoeuvres or kept dormant for future use in some other capacity. Therefore, one needs to look at the shareholding pattern – whether there is any promoter stake or their stake is nil; fixed assets; revenue pattern over the years; and the dividend payment track record to assess if the firm is a shell company or not, experts suggest.

Also Read: Suspected shell company Prakash Industries zooms 208% in 2017

“For companies that are found to be clean and genuine, there will be a rectification and there is no need to panic. For the others, investors have no recourse. Even if they are permitted to trade once a month, there will be no buyers for such a stock. It is advisable to take a hit / write-off losses,” advises G Chokkalingam, founder and managing director of Equinomics Research & Advisory.