The Securities & Exchange Board of India (SEBI) has finally got around to announcing plans to force over 4,200 companies to delist from the bourses. These are companies whose shares have been suspended for over seven years by the two national exchanges (1,200 companies), or those which were exclusively listed on de-notified regional exchanges (3,000 companies). According to SEBI, the companies will have to offer an exit option to investors this fiscal.
The exit will be at a fair value which will be determined by a third-party valuer appointed by the bourses. Promoters, who do not cooperate with the regulator or fail to provide an exit option to investors, could face the prospect of being barred from raising funds from the capital market or from taking up board positions.
What the SEBI chairman did not mention at the press conference where this was announced is that the MS Sahoo committee, set up under SEBI’s own whole-time director had recommended action against promoters, directors and compliance officers of 2,048 companies for failing to comply with listing agreements way back in 2010, but no action was initiated.
While SEBI’s decision is laudable, everything depends on implementation. If managed well, the number of companies listed on our bourses will drop sharply from around 8,000-odd companies (as of March 2015). In all likelihood, SEBI’s plan to act on this issue has been prompted by a special leave petition filed by the Midas Touch Investors Association (MTIA) in the Supreme Court which would have come up for hearing some time soon. Let’s look at how the decision will benefit various stakeholders.
Retail investors have been angry about trading of several stocks being suspended for years on end for non-compliance with listing norms. Investors who have dematerialised shares end up paying demat charges every year for shares that have no market. Although SEBI says re-materialisation (conversion of electronic shares back to a paper certificate) of shares is an option, the high cost makes it a meaningless alternative. Virendra Jain, founder of MTIA, points to the plight of companies listed on regional bourses. He says, de-recognised bourses were asked submit details of companies listed exclusively on them to SEBI, but it did not initiate any follow-up action, although only 500 companies have got re-listed on the national exchanges under a SEBI plan. Further, in his reckoning, a whopping Rs58,000 crore is blocked in just 1,450 companies that have been suspended for over seven years only by the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange). On including companies listed on regional bourses that are either defunct or denotified, the amount blocked would go as high as Rs1.5 lakh crore, he says.
India’s oldest bourse, the BSE has long been complaining about the onerous burden it faces due to the legacy listing of over 5,500 companies. The listing fees in these cases is a pittance compared to the responsibility of monitoring compliance with the listing agreement which has increased manifold in the past two decades. On the other hand, the NSE started operations with a selected group of companies and, even today, it has only 1,696 companies listed on it. The BSE will be a big beneficiary of the move to weed out 4,200 listed stocks and probably make it more attractive investment as it prepares to go public this year.
SEBI itself has been facing flak from a Supreme Court-appointed committee for its failure to stop rampant price manipulation in little-known, penny stocks, for tax avoidance. SEBI chairman, UK Sinha, is quoted in the media as saying that this move will help the regulator “get rid of many shell companies which were being used by promoters and market operators to manipulate stocks. It will help ease the regulatory burden.” While reducing the number of listed companies will, indeed, improve regulatory oversight, it is not clear how actively traded or manipulated companies can be considered shell companies if they are fully compliant with listing norms, disclosures and fees. Neither SEBI nor the bourses show any interest in rampant price manipulation and money laundering that is routine in Indian bourses. Moneylife has been writing about one such case in each issue for the past several years. It remains to be seen how the threat of punitive action actually plays out and whether companies opt to pay investors and exit price and delist shares or comply with the rules and resume trading.