SEBI asks suspected shell companies to cooperate in forensic audits, warns of stringent trading curbs

New Delhi: SEBI has asked over a dozen suspected shell companies to extend cooperation to ensure completion of forensic audits in a time-bound manner, failing which they would face stringent trading curbs. The forensic audit is being conducted by independent auditors appointed by the stock exchange on the direction of the markets watchdog. Independent directors have been mandated to conduct forensic audits for verification of credentials or fundamentals of such companies. Shell companies are dubious entities that are mainly used for illegal money laundering. However, the term ‘shell company’ is not defined under the Companies Act. In a circular uploaded on BSE website on Monday, SEBI has advised as many as 13 companies “to cooperate with the audit firm to complete the forensic audit in a time-bound manner”. These firms are: Aadhaar Ventures India, Alka India, Allied Computers International (Asia) Ltd, Blue Circle Services, Decillion Finance, IKF Technologies, Prabhav Industries, S T Services , Sanguine Media, Scintilla Commercial & Credit, Silverpoint Infratech, Premium Capital Market & Investments and Winy Commercial & Fiscal Services. [caption id=“attachment_4307425” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] In case a company fails to cooperate, then consequential actions will be initiated. It has been noted that several opportunities have been provided to companies to provide requisite documents / information to the audit firms for completion of audit but despite that, the firms have failed to comply with the exchange directions. Since the verification process is a time-bound activity and needs to be concluded in line with SEBI’s defined process, as a last opportunity, a period of 10 days is granted to all such companies to provide their response or information to the forensic auditor. “Exchange shall not be granting any further extension of time and the concerned companies are advised to strictly adhere to the process…and cooperate with the audit firm to complete the said process in a time-bound manner,” as per the notice. In case such companies do not provide all information to audit firms within 10 days or continue non cooperation with audit firm, then “securities of the concerned company shall be reverted back to ‘Stage VI’ of Graded Surveillance Measures (GSM) framework with immediate effect as per SEBI letter dated August 7, 2017”. The Stage VI (six) of GSM restricts the trade in securities to once in a month with additional deposit. If the securities of the company continue to be in Stage VI for a month pursuant to non-cooperation by the company, then trading in the securities of such company will be suspended, followed by initiation of compulsory delisting process, as per the notice. Further, if the concerned company cooperates with the audit firm and submits the required documents to their satisfaction, the exchange would review its action, if any accordingly, it added. In case of no adverse FA (forensic audit) observations, the exchange will issue suitable direction to remove restrictions imposed on promoters, directors of the concerned companies. On 7 August, 2017, SEBI had directed bourses to initiate action against 331 suspected shell companies that are listed. The regulator’s directive came after the corporate affairs ministry shared a list of 331 listed companies that are suspected to be shell entities and could even face “compulsory delisting”.