Sebi hits new low with non-transparent ‘shell companies’ order
Stock market investors and observers had a Kafkaesque moment on Tuesday after the Securities and Exchange Board of India (Sebi) ordered stock exchanges to effectively freeze trading in 162 companies. These companies are from a larger list of 331 (trading in the remaining 169 had already been suspended for unrelated reasons) suspected shell companies provided to Sebi by the ministry of corporate affairs (MCA), which, in turn, drew the list based on inputs from the income-tax department, the Serious Fraud Investigation Office (SFIO) and other agencies.
The ruling is particularly strange because it doesn’t give the affected companies, and their directors and shareholders any opportunity to be heard even after the passing of the order, leave alone being heard before the sanctions were put in place.
Jayant Thakur, a chartered accountant who specializes in securities law, says, “It’s important to note that while the Sebi Act of 1992 allows the regulator to pass orders while its investigation or inquiry is still pending, it specifically states in section 11 (4) that this is done on the condition that it shall give an opportunity of hearing to the affected persons either before or after such orders are passed”.
Perhaps, Sebi is so resolute in its belief these are shell companies that it thought serving notices to non-existent officials was a waste of time. On a more serious note, it appears to be tiptoeing around section 11 (4) by issuing the order to the stock exchanges, and not to the individual companies. But even so, it’s clear as daylight that the companies, and their directors and shareholders are affected by its order. An appeal by any of them could well cause the order to be overruled by Securities Appellate Tribunal.
Of course, it’s nobody’s case that action shouldn’t be taken against companies that are found to have flouted the country’s laws. But this should be done by following the due process of law.
Thakur adds that a reading of Sebi’s order suggests it hasn’t initiated any investigation, nor does it hint at starting any investigation in the future.
Sebi hasn’t bothered to point out what provisions of its laws have been flouted, or for that matter, what provisions of any of the country’s laws have been flouted.
These companies have to somehow find out what Sebi’s charges against them are, before they can even begin framing a defence. But since Sebi hasn’t specified any redressal mechanism for the affected companies, it’s not even clear if this will be worth their effort.
Sebi’s instructions to the stock exchanges state that if any of these companies are indeed found to be shell companies, then they should be compulsorily delisted. It hasn’t bothered to say what should be done with companies which are not found to be shell companies.
In a nutshell, Sebi’s order flouts all principles of natural justice. It should correct this quickly by providing these companies a redressal mechanism.
Sebi seems also to have scant regard for minority investors in these companies.
The trading restrictions are so onerous that they will practically result in a freeze in trading activity in these stocks. To think that all of this is happening without putting out any investigation report is clearly taking things too far. Every now and then, Sebi acts in ways that raise questions over its competence as well as its capacity to enforce its rules in a fair and transparent manner. But with its latest action, it has hit a new low that is miles below its previous missteps.