Sebi crackdown on shell companies: It's the larger interest of nation's good that matters, not the few hurt investors

As expected some of the alleged shell companies done in by the Securities and Exchange Board of India (Sebi) crackdown on them have gone to the Securities Appellate Tribunal (SAT), and might receive suitable redressal. But that does not mean the government was wrong or hasty in cracking down on shell companies.

Last month, Prime Minister Narendra Modi while addressing chartered accountants at their annual general meeting in Delhi said as many as 1 lakh shell companies have been de-registered and 37,000 more have been identified for further action.


Angry commentators and editorials question the Sebi action and term it as being unfair as neither the investors nor the companies have been told in black and white what their fault was. In other words, one of the fundamental principles of natural justice, audi alteram partem (hear the other side) has been violated. This, according to them, is unjust coming as it does from a quasi-judicial body like the Sebi.

For the uninitiated, the Securities and Exchange Board of India (Sebi) on 7 August, 2017 forwarded a list of 331 suspected shell companies to the stock exchanges directing them to take corrective action. Accordingly, the Bombay Stock Exchange (BSE) on 8 August placed 162 companies out of the total 331 in the list, in the stage VI of the Graded Surveillance Measure (GSM) with immediate effect.

Courtesy: IBNLive

Courtesy: IBNLive

Under the stage VI of GSM framework, trading in these identified securities shall be permitted only once a month under trade-to-trade category. Further, any upward price movement in these securities shall not be permitted beyond the last traded price and additional surveillance deposit of 200 percent of trade value shall be collected form the buyers which shall be retained with exchanges for a period for five months.

To slap first and then ask questions is indeed bad, but critics have been presumptuous when they allege lack of any enquiry on the part of the authorities before the crackdown.

The government has mined enormous and copious amount of data on shell companies and their activities. It is acknowledged that incorporation has been abused in this country as indeed elsewhere for carrying on nefarious activities including tax evasion and parking ill-gotten assets. The anonymity conferred by faceless companies is the main attraction for crooks.

Lifting off of the corporate veil is a well-recognised and time-tested weapon in the arsenal of justice to unearth activities inimical to the nation. If inquiry reveals prima facie wrongdoing, then the government must act forthwith lest it is accused of closing the stables after the horses have bolted.


Now comes the question of interests of shareholders and investors in the shares of the listed companies. While it is true that listing is the gravitas for investors in shares as it guarantees free entry and exit on transparently determined terms in the bourses, it is equally true that investors invest at their own peril if they are not sufficiently vigilant before parting with their money especially in the primary market at the time of IPO.

True, companies have been mandated to come clean through their prospectuses and other offer documents but no amount of precaution is too much because wrongdoings do occur despite disclosures.

Investors ought to wonder what a company is doing. There are investors who blindly follow the market in a spirit of herd-mentality. It is surprising that they did not demur despite knowing the companies concerned in some cases did not carry on any activity much less showed turnover.

Suspension of trading does hurt investors and the market but it is inevitable when nation’s interests have to be protected. If it turns out that the government and the Sebi have indeed been high-handed with some companies, then that is altogether a different issue to be addressed separately.


Published Date: Aug 10, 2017 12:53 pm | Updated Date: Aug 10, 2017 01:35 pm



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