‘Shell’ Shocked Companies Consider Response To Sudden SEBI Freezing Of Shares
The securities market regulator has put 162 listed entities in a restricted trade category on the basis that they are shell companies as identified by the Ministry of Company Affairs.
As of today, August 8, the shares of these companies can be traded only once every month under the trade-to-trade category with certain other restrictions, according to a communication by the Securities and Exchange Board of India. Since that one trading day is the first Monday of the month, trade in the securities of all the affected companies was suspended today itself. Promoters of these companies cannot sell their shares till the restriction is lifted.
Of the 162, 19 companies have a market capitalisation of over Rs 100 crore each. Some of the prominent ones include J Kumar Infraprojects Ltd., Parsvnath Developers Ltd., Prakash Industries Ltd. and SQS India BFSI Ltd.
The move stems from the broader agenda of curbing black money, Amit Tandon, managing director of proxy advisory firm IiAS, said in an interview to BloombergQuint.
A lot of it had to do with the increased number of transactions during demonetisation when they probably came under scrutiny.Amit Tandon, MD, IiAS
The companies, however, must get a chance to explain, Tandon said, noting that the process followed to identify these companies and impose punitive measures on them remains unclear.
Two affected companies told BloombergQuint, on the condition of anonymity, that they intend to approach the regulator to explain that they are not shell companies as they have an operating track record.
Pincon Spirit told BloombergQuint in a statement that it had no prior information regarding SEBI’s action.
An executive at a mutual fund invested in an affected company said they are watching developments closely. He too did not want to be identified.
In a statement released late Tuesday afternoon J Kumar Infraprojects said it is not a shell company and the suspicion of the regulator is uncalled for. The company statement pointed out that a majority of its clients consist of government authorities, listing the Mumbai Metro and Delhi Metro and JNPT Port connectivity as some of the projects underway.
We are seeking legal advice in the matter and we are approaching the regulator ie SEBI, requesting it to recall its direction qua us.J Kumar Infraprojects Media Statement
Realty builder Parsvnath Developers said it is not a shell company "by any stretch of imagination". The company, in a media statement, said that serious prejudice has been caused to the company due to SEBI's actions.
The directions issued by SEBI in terms of the letter under reference are completely uncalled for and is without any basis. We have never ever indulged in malpractices in the stock market.Parsvnath Developers Media Statement
The Back Story
In February, a Ministry of Finance statement said “harsh punitive action” would be taken against “deviant shell companies”. A task force had been set up under the co-chairmanship of the Revenue Secretary and Corporate Affairs Secretary with members from various ministries and enforcement agencies, the statement said.
There are about 15 lakh registered companies in India; and only 6 lakh companies file their annual return. This means that a large number of these companies may be indulging in financial irregularities.Ministry Of Finance Statement (February 10, 2017)
The statement said shell companies are characterised by:
- Nominal paid-up capital.
- High reserves and surplus on account of receipt of high share premium.
- Investment in unlisted companies.
- No dividend income.
- High cash in hand.
- Private companies as majority shareholders.
- Low turnover and operating income.
- Nominal expenses.
- Nominal statutory payments and stock in trade.
- Minimum fixed asset.
It is not clear what specifically has prompted the ministry or SEBI to identify these 162 companies as shell companies. The securities regulator has asked exchanges to initiate a process of verifying the credentials and fundamentals of these companies and appoint an auditor to audit them.