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Investors are paying the price for companies’ failure to follow listing norms and the companies are allowed to get away scot-free by the exchanges and regulators. A PIL is seeking probe by the CBI into this gross mischief
It is estimated that as much as Rs1 lakh crore of savings have been flushed down the drain because of poor supervision and regulation. This attitude continues to be evident in the regulators’ stand on public interest litigations (PILs) filed by investor rights groups.
Midas Touch Investors' Association has filed a PIL in the Delhi High Court alleging, among other things, that stock exchanges have failed, as first line regulators, to ensure compliance of the listing agreement by companies and take action in the event of non-compliance. How did the Securities Exchange Board of India (SEBI) react? Its affidavit in response says, the PIL is “devoid of merit”and has been filed by the petitioner “without appreciating the fact that the interest of the investors have duly been taken care of and protected” by SEBI.
How true is this? Well, consider some facts. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) told a committee chaired by MS Sahoo in 2010-11, that 1,845 companies listed at BSE and 203 companies at NSE were not in compliance of the listing agreement terms. Trading in securities of most of these 2,048 companies (out of 5,000 companies listed on the BSE and NSE) has since been suspended leaving small shareholders holding illiquid shares. In effect, investors pay the price when companies do not meet listing norms—the companies themselves get away scot free. The table provides the number of companies that are suspended by the BSE each year since 1995.
Midas Touch estimates that the total value lost to investors due to these suspensions is a high as Rs1 lakh crore due to their investment in around 3,000 such companies listed on the BSE, NSE and 14 regional exchanges.
What action has SEBI taken against these companies? Its counter affidavit filed in the court provides the answer. SEBI claims to have initiated action against 23 companies for failure to redress investor grievances. Of these, it proposes to start adjudication proceedings in 19 cases. It is important to note that the MS Sahoo Committee itself was constituted by SEBI only on Midas Touch’s insistent demand, as a accredited investor association, to initiate action against companies that forget about investors once they have raised public money and are no longer interested in staying listed and following onerous compliance and disclosure rules.
Do SEBI and the bourses have other powers that could have been invoked against these companies instead of suspending trading, which only hurts investors? The petition documents that too.
According to Midas Touch, the Securities Contracts (Regulation) Act (SCRA) gives plenty of scope for regulatory action.
* Under Section 23A, the failure to furnish information, returns or report to stock exchange within the time specified in the listing agreement is liable to be punished with a penalty of Rs1 lakh per day or Rs1 crore, whichever is lower.
• Section 23E provides for a penalty of up to Rs25 crore for failure to comply with provisions of listing conditions.
Failing to comply with the listing agreement is also liable for prosecution u/s 23(2) of Securities Contracts (Regulation) Act, 1956 (SCRA). Stock exchanges can initiate this prosecution and the law provides for imprisonment that may go up to 10 years with or without a fine, which may be as high as Rs25 crore.
As Midas’s writ petition points out, SEBI’s failure to invoke these powers and perform its statutory duties, “has enabled thousands of listed companies, their promoters and directors to get away with unfair practices and violation of listing agreement terms”. It says “Small investors are the biggest losers due to such inaction. Resultantly, their estimated investment of over Rs1 lakh crore has been blocked, is in suspended animation for years and perhaps gone down the drain with all its ramifications on the health of securities market and economy.
The number of affected small investors may be one crore. They have lost heavily and withdrawn from the securities market, severely affecting fund-raising by companies for speedier development of the economy.”
The petition also points out what Moneylife has harped upon with monotonous regularity. “During two decades of enactment of SEBI Act, 1992, the number of retail investors has gone down from two crore to 80 lakh; Share of household savings deployed in the securities market has gone down drastically, during first half of 1990s over 10% of financial household savings were deployed in the securities market which has dropped to around 4% currently”.
Midas goes on to expose SEBI’s track record. It says, SEBI ought to have initiated “Prosecution/Penalty proceedings against more than 12,000 promoter and directors (an average of six directors and promoters per company) and 2,000 compliance officers/company secretary of 2,048 companies u/s 23 A, for each year, starting from the year 2004.
It ought to have started adjudication proceedings against over 20,000 entities for penalty u/s 23E and filed criminal complaints u/s 23(2) against defaulting companies and the persons responsible.”
Instead, SEBI was more occupied with disposing off 1,755 cases in four years through the consent mechanism rather than start direct adjudication action even in a dozen cases over the past eight years.
Midas Touch concludes that this smacks of an unholy nexus between unscrupulous corporates, stock exchanges and SEBI to loot ordinary investors. Its petition has asked for direction to the Central Bureau of Investigation (CBI) to investigate, fix accountability for dereliction of duty by SEBI and stock exchanges officials and take appropriate action against them. It also seeks a write of mandamus directing SEBI to act on the recommendations of the Sahoo Committee in a time-bound manner and to start adjudication proceedings against promoters of all the suspended companies under the SCRA provisions.
Given that the tariff applies from November 2008, GAIL will have to return excess tariff/ship-or-pay charges to customers, says Nomura Equity Research in its First Look note
The Petroleum and Natural Gas Regulatory Board (PNGRB) has made it clear that the approved tariff for the KG basin pipeline network of Rs5.56/mmBtu (million metric British thermal unit) is 53% lower than what GAIL was seeking and 59% lower than what it is currently charging. This is a retroactive order applicable from 20 November 2008. According to Nomura Equity Research in its First Look note, this will have a negative impact for GAIL.
For the past period, GAIL will need to provide one-off provision of Rs5.7 billion. This implies a post- tax EPS impact of Rs3 per share. The annual revenue impact on GAIL is Rs1.5 billion. This implies a post-tax EPS impact of Rs0.80 per share. These are Nomura estimates and it forecasts, “Given that the tariff applies from November 2008, GAIL will have to return excess tariff/ ship-or-pay charges to customers.”
The key reasons for PNGRB’s lower tariff are lower assumptions of net block (32% not allowed), future capex (33% not considered) and opex (33% not considered), plus 16% higher pipeline volumes and lower inflation of 4.5% (versus 5% considered by GAIL), according to Nomura analysts. Similarly, to earlier tariff orders, the regulator allows no unaccounted gas provision (versus 0.60% sought by GAIL). Given that most pipeline networks face unaccounted gas losses, Nomura believes that the companies should be compensated for normative losses.
The current tariff order is a provisional tariff order with the final tariff to be decided in a year’s time. Nomura thinks that GAIL will challenge the tariff order.
The likely impact of the tariff order on GAIL’s revenues and net profits are worked out in the following table by Nomura analysts: