Shell companies tag: SAT stays Sebi order against J Kumar, Prakash Industries
Mumbai: The Securities Appellate Tribunal (SAT) on Thursday stayed a 7 August Securities and Exchange Board of India (Sebi) directive against J. Kumar Infraprojects Ltd and Prakash Industries Ltd labelling them suspected shell companies.
Stock exchanges will now have to lift trading restrictions on these companies and allow regular trading of their shares. J Kumar and Prakash Industries shares will resume trading on Friday, BSE said in a late evening notice.
“We are prima facie of the opinion that the impugned communication issued by Sebi on the basis that the appellants are ‘suspected shell companies’ deserves to be stayed,” said SAT in its order.
Three companies—J. Kumar, Prakash Industries and Parsvnath Developers Ltd—on Wednesday approached the tribunal against their inclusion in a list of 331 suspected shell firms against whom the market regulator sought action by stock exchanges.
Sebi had asked exchanges to independently audit these firms, and if necessary, appoint a forensic auditor.
Sebi’s communication to stock exchanges had said its directive was based on a 9 June letter from the ministry of corporate affairs (MCA) identifying these 331 firms.
SAT observed that the very fact that the regulator took two months to comply with the MCA letter shows that there was no urgency in passing directions without verification of the companies.
“There will be a flurry of petitions as more companies will move SAT for a similar relief. Even (in) cases where the(se) are actual shell companies, it is a procedural lapse (on Sebi’s part). A thorough investigation against suspect companies with proper process should be done and then fresh notices can be issued," said Ramesh Vaidyanathan, founder and managing partner at law firm Advaya Legal.
The plea by Parsvnath will be heard on Friday.
Jog Singh, a member of SAT, said during the course of the hearing that Sebi acted as a postman (for MCA) without application of mind.
“It is apparent that the impugned order was passed by Sebi without any investigation,” SAT said in the order.
Darius Khambata, senior counsel appearing for Sebi, argued that the plea by the petitioners was not maintainable.
“The Sebi directive is a function performed by the regulator in an administrative capacity and constitutes a circular, which according to Supreme Court judgement in the matter of NSDL (National Securities Depository Ltd) cannot be challenged,” said Khambatta.
Khambatta was referring to a 7 March judgement of the Supreme Court wherein it ruled that SAT has jurisdiction only over orders and directions passed by the capital markets regulator in a quasi-judicial capacity.
However, SAT said that since a Sebi whole-time member (WTM) approved the directive, it falls in the realm of a quasi-judicial order.
“Since the impugned communication which is approved by the WTM of Sebi seeks to suspend the trading in the securities of the appellants, on day to day basis the impugned communication is in effect referable to a quasi judicial order and not an administrative order,” the tribunal said in the order.
Sebi, in its affidavit to SAT, said that after receiving the MCA letter, it had written to the exchanges on 24 June seeking details about the 331 companies.
The exchanges replied to the regulator on 4 July and finally the whole time member approved the decision to ask stock exchanges to act against these companies on 28 July.
In any case, after companies started approaching SAT on Wednesday, Sebi wrote to exchanges asking them to look at tax returns and other financial documents and decided to give all these companies a hearing.
Late on Wednesday, Sebi issued show-cause notices to J Kumar and Prakash. During a personal hearing on Thursday morning, the regulator asked the companies to provide more documents.