J Kumar Infra, others move SAT against shell company tag: Were they probed before order, tribunal asks Sebi

Mumbai: A number of companies, including Parsvnath Developers, JKumar Infraprojects and Prakash Industries, on Wednesday moved the Securities Appellate Tribunal (SAT) against Sebi classifying them as "shell companies", contesting that their businesses are legitimate.

Defending the move, Sebi said it took the action after receiving the list of companies from the corporate affairs ministry. Several other firms are expected to take similar recourse to challenge the market regulators decision asking stock exchanges to restrict trading in 331 firms for being "suspected shell companies".

JKumar Infraprojects and Prakash Industries told SAT that their businesses are legitimate and that they are not shell companies. The tribunal asked Sebi as to why the matter was not investigated before issuing the circular. The companies also submitted that the regulator got the information from the corporate affairs ministry and subsequently asked the exchanges to investigate and take action. The hearing at the tribunal has been adjourned till Thursday (today).

According to the submissions, the list of 331 companies was received by Sebi on 9 June and the circular was issued on 7 August. The tribunal wanted to know what action was taken during the intervening period. The regulator is expected to give its reply today.



In their appeals, the companies have named the exchanges as opposite parties. The term shell company is not defined under the Companies Act but Corporate Affairs Minister Arun Jaitley had told the Lok Sabha recently that many such entities have been found to be indulging in large scale tax violations.

Contrary to general perception, shell companies are apparently being referenced here for those suspected to have indulged in abetment of tax evasion and money laundering activities post- demonetisation, including through share dealings, regulatory sources said. Many of those stocks also saw huge jump in their prices and volumes after demonetisation in November last year.

Last month, Prime Minister Narendra Modi had said 37,000 shell companies indulging in tax evasion had been detected and more than three lakh firms were under the scanner for suspicious dealings after demonetisation. Sebi has asked the exchanges to restrict trading in shares of 331 "suspected shell companies", some of which have investments by several well-known domestic and foreign investors.

The BSE on Wednesday imposed maximum trading curbs on five remaining firms from Sebi's list of 331 suspected shell companies. With the latest move, the exchange has expanded the restrictions to a total of 167 stocks. Out of the list, trading in 164 companies was already suspended for various penal reasons or as part of surveillance measures, before Sebi issued directions to the stock exchanges seeking actions against 331 firms, alleged to have indulged in tax-related and other violations.

In a statement, the National Stock Exchange (NSE) said it has started collecting information about the 48 firms, that are listed on its platform, out of the list of 331 companies. Out of the 331 companies, shares of more than 160 firms are actively traded on the exchanges. "We have filed an appeal before SAT. Our plea is to set aside the Sebi order. We are not a shell company and we have complied with all the rules and regulations and not evaded any tax," Parsvnath chairman Pradeep Jain said.

On Tuesday, many of the companies tagged annual reports and other financials along with their filings to press upon the exchanges that they are not shell companies and are in compliance with all regulations.

"We are shocked to find our company's name amongst the list of suspected shell companies as a result of which, our equity shares...are being shifted to GSM VI on the stock exchanges. As a result, our company's securities may be traded only once in a month on a trade to trade basis and Sebi has envisaged a "financial audit" thereby implicitly castigating us and tarnishing our reputation," Parsvnath had said.

Similarly, J Kumar Infraprojects had said it is not a shell company and suspicion of the regulator is uncalled for.

Prakash Industries had also said that directions issued by Sebi are "totally devoid of merit and uncalled for. Besides, there has never been an occasion when our company has indulged in any kind of malpractices in stock market".

In a communication sent to the BSE, the NSE and the Metropolitan Stock Exchange on Monday, Sebi had asked them to keep the 331 shares in stage six of the Graded Surveillance Mechanism (GSM) with immediate effect. These entities would be subject to independent audit and if required, forensic audits could also be initiated to check their credentials.

Apart from initiating a "process of verifying the credentials/fundamentals of such companies", the exchanges have also been asked to appoint an independent auditor to carry out audit of these entities. If necessary, even forensic audit could be ordered to verify their credentials and fundamentals.

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Updated Date: Aug 10, 2017 08:23:04 IST

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