Mumbai: The capital market regulator intends to reduce the number of listed companies to curb the risk of price manipulation through entities that are not actively traded.

The Securities and Exchange Board of India (Sebi) will also increase oversight of auditors and take action against them if they are found to have abetted market manipulation.

Both steps are intended to improve the governance of public markets and companies listed on them.

Outlining the priorities for 2016-17, Sebi chairman U.K. Sinha said the regulator will significantly reduce the number of listed entities over the course of this year.

For a start, Sebi will ask companies that have been suspended from trading for seven years to delist from the exchanges by giving an exit option to investors. Such companies are typically suspended from trading for non-compliance with rules. Technically they are still listed and hypothetically they can start trading again if they become compliant.

The exit option will be provided by setting a fair value for the shares. This fair value will be determined by a third-party valuer. There are about 1,200 such entities, Sinha told journalists.

In a second step, companies listed only on regional stock exchanges will also be asked to delist. About 500 companies have moved from regional exchanges to national exchanges; a number of regional exchanges have been shut down.

The ones that did not could be asked to provide investors an exit option and delist, said Sinha, adding that the exit option would be provided via the fair value method. There are about 3,000 such companies.

“Sebi will take strict action against promoters who do not provide an exit to investors and may look at debarring them from the markets," said Sinha.

“By doing this, we will also help solve issues like capital gains manipulation that may have been routed through such entities," Sinha added.

More than 5,500 companies are listed on BSE Ltd and 1,900 on the National Stock Exchange of India Ltd.

“You need to divide this into two parts. There are a large number of listed companies that have stopped reporting and are declared as vanishing companies. There is enough reason to take them out as they are nothing more than a nuisance and can be used for mischief," said Sandeep Parekh, founder, Finsec Law Advisors, a legal firm.

“The second category, of small companies listed on regional exchanges, need a little more sympathy because they may not be in a position to list on exchanges like BSE and NSE. But giving them an exit opportunity by determining a fair value is a reasonable approach," said Parekh.

The number of listed companies in India are an unnecessary regulatory burden on Sebi and stock exchanges, said J.N. Gupta, co-founder and managing director of Stakeholders Empowerment Services, a proxy advisory firm.

“It is a good move to bring down the number of listed companies," said Gupta, adding that among the companies would be those that could have been used for market manipulation.

Gupta, however, cautioned that Sebi would have to be careful to ensure this doesn’t become an incentive for companies to become non-compliant with rules to delist as opposed to following regular delisting norms.

Oversight of auditors

Separately, Sebi also said that it would look to take action against auditors if it finds that they had a role to play in market manipulation. So far, Sebi has acted against auditors only in rare cases since they are not directly regulated by it.

Auditors currently come under the self-regulatory framework of the Institute of Chartered Accountants of India. While the new Companies Act proposed an independent regulator for auditors, that section of the act has not been notified.

“We have sufficient powers under Sebi Act to take action if needed," said Sinha, adding that gatekeepers such as auditors must be held accountable.

“If Sebi finds that auditors have also been involved or negligent, we will go after them," he said.

To be sure, Sebi has already turned tough on auditors.

For the first time, in February, the regulator debarred an auditor from issuing certificates for a wide range of entities and purposes. A 17 February order from Sebi prohibited Shashi Bhushan, proprietor of audit firm Bhushan Aggarwal and Co., from issuing any certificate required under securities laws for one year.

This order was related to a listed realtor named Ritesh Properties and Industries. Its shares had shot up from 3.52 apiece to 123.50 between 2006 and 2008.

The company had recognised a huge amount of revenue, claiming construction of projects. In 2009, it wrote back all of this. Sebi in its order said the auditor had aided and abetted the company in committing the alleged fraud.

“The role of the auditors is important in all aspects of companies. There have been enough instances of auditors failing us, so Sebi’s stance is justified," said Gupta.

Listing of stock exchanges

Commenting on the listing of stock exchanges, Sinha reiterated that any exchange aspiring to list would need to do so under the current regulatory framework.

“We have a set of guidelines. Any exchange willing to list would need to do so as per the prescribed provisions," he said.

On 1 January, Sebi issued a notification on amendments to the Stock Exchanges and Clearing Corporations (SECC) rules which stated that “...a recognized stock exchange may apply for listing of its securities on any recognized stock exchange, other than itself and its associated stock exchanges".

NSE has maintained that it would either want a self-listing or a structure that ensures that a competing exchange does not have regulatory oversight of it. Sebi’s stance suggests neither of those two options would be allowed.

In an email, an NSE spokesperson said that while there are concerns, the exchange is keeping all options open.

“NSE Listing Committee (LC) has already met multiple times. LC is taking views on all available options, keeping in mind the interests of the shareholders. May note that the LC has representations from shareholders as well. Besides, the LC is aware of the current framework as well as NSE’s priorities. There are multiple concerns, which are being addressed and thus it’s premature to comment further. At the same time we respect the regulator and believe that all issues will be settled soon," he said.

The listing committee, formed on 26 February, is yet to submit recommendations to NSE’s stakeholders relations committee for review. These recommendations would later need to be approved by the NSE board.

When asked whether Sebi would be comfortable with an Indian exchange listing overseas, Sinha said the regulator would consider the matter if and when it receives such a proposal.

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