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Mumbai: At least 626 BSE-listed and 151 NSE-listed companies were found to be flouting the capital market regulator’s equity listing agreement and corporate governance norms.

Following a direction from the Securities and Exchange Board of India, or Sebi, in November to the two pan-India exchanges to detect non-compliant firms and impose penalties on them and make their names public, the bourses found a total of 1,111 violations of various key clauses of the equity listing agreement norms, based on an assessment for the quarter ended 31 December.

BSE Ltd revealed 960 instances of non-compliance, and the National Stock Exchange (NSE) detected 151 such instances. NSE has suspended 119 firms from trading for not submitting their corporate governance reports for the quarter ended December.

Though the penalties imposed on non-compliant firms are small, as per Sebi’s latest circular, an exchange is required to suspend trading in the shares of a firm if it fails to comply with the norms and pay the required fine. In the event of such a suspension, the promoter holding of the firm will be frozen for three months even after the suspension is revoked, under Sebi’s norms.

“Though the amounts of penalties stipulated by Sebi are small, what is more important now is that stock exchanges are making their names public and leaving it for the marketplace to make their own assessment," said Akil Hirani, managing partner at international law firm Majmudar and Partners. “This, in turn, may affect investment decisions by larger shareholders such as FIIs (foreign institutional investors) as globally corporate governance and listing compliance are considered very seriously."

To help all classes of shareholders know firms better while investing in them, Sebi had in September and November asked BSE and NSE to detect the names of firms that may not be complying with key clauses of the listing agreement norms.

The market regulator, which has been emphasizing the need for transparency and better corporate governance, is of the view that by concealing timely and accurate information, companies are preventing public investors from taking informed decisions.

“Concerns have been raised that even though listed firms make disclosures to stock exchanges within the timeframe stipulated under the listing agreement, the contents of the disclosures made by such firms are not adequate and accurate. Therefore, investors are unable to take informed investment decisions based on such disclosures," Sebi said in its November notification.

To begin with, Sebi asked the bourses to assess the adequacy and accuracy of disclosures made by the top 500 listed firms (by market capitalization, as on 31 March 2013) for the quarter ended 31 December. As on Tuesday, 6,994 firms were listed on BSE and NSE, with 5,311 of them on BSE.

The market regulator had said in its circular that the parameters of assessment for listed firms include compliance with clauses 31, 35, 36, 41 and 49 of the equity listing agreement. Clause 31 relates to submission of annual report, clause 35 to non-submission of shareholding pattern in time, clause 41 addresses submission of financial results, and clause 49 relates to the submission of the corporate governance compliance report in time. Clause 36 relates to disclosure of information about events that may have a bearing on the performance or operations of the company and is price-sensitive in nature.

Sebi directed the exchanges to impose fines on non-compliant firms before suspending trading in their shares.

As part of the initial action, the two exchanges have imposed penalties and suspended trading in companies’ shares mostly for non-compliance with clauses 35 and 49.

BSE has imposed a total fine of 2.56 crore on companies breaching clause 35, and a fine of 44.54 crore for non-compliance with clause 49. NSE has imposed a total fine of 9.34 lakh on 32 firms. This fine amount will keep increasing since it is imposed on a per-day basis.

According to Sebi, for violation of clause 35, a penalty of 1,000 per day can be imposed till the date of compliance and after 15 days of non-compliance an additional fine of up to 1 crore can be slapped on the non-compliant firm. For non-compliance with clause 49, a fine of 1,000 per day can be imposed till the date of compliance. For violating clause 41, the list for which is yet to be put out, a fine of 5,000 per day can be imposed till the date of compliance and up to 1 crore after 15 days of non-compliance. “Through this whole process, at least listed firms will get more serious about protecting their name in the market and this will eventually make them comply with the norms and help public shareholders get all the required disclosures in time," said Sandeep Parekh, founder of Finsec Law Advisors Ltd. “So, as a first step, Sebi’s move is in the right direction. In the second phase, one will need to also ensure that not merely disclosures are made on time but also the sanctity and authenticity of information is maintained."

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