More than 3,000 listed companies have disappeared over the years. Even after a massive exercise and expenses, by the executive, Parliament and High Court's order, investors continue to be in a lurch
Over the last two decades, hundreds of companies that have vanished after picking up hundreds of crores of rupees from investors. And despite, direction from High Court some 15 years back, none of the investors have received a single penny. Hearing a public interest litigation (PIL), the Allahabad High Court had also directed the central government to set up a joint co-ordination and monitoring committee (CMC) to identify companies, which had disappeared after raising money from public issues and recover money from them.
Later, the Joint Parliamentary Committee (JPC) also took up this issue and in its report to the Parliament in 2002, recommended: “What the Committee are seriously concerned is about how the investors may get their money back from the vanishing companies. The Committee urge that Securities and Exchange Board of India (SEBI), the (then) Department of Corporate Affairs (MCA), Company Law Board (CLB) and Reserve Bank of India (RBI) should work seriously towards achieving this objective and take all necessary steps, including attachment of properties of directors of vanishing companies.”
The Allahabad HC order approved that the CMC would settle the policy issues regarding the delinquent companies/ promoters and would monitor the progress in regard to the action. The Secretary, DCA (now Ministry of Corporate Affairs) and Chairman of SEBI would be the co-chairman of the CMC and senior officials of DCA and SEBI would be other members.
Seven Task Forces, comprising of Regional Director/ Registrars of Companies (ROC), SEBI and stock exchange officials, would assist the CMC and identify companies which have disappeared or which have mis-utilised the funds mobilised from the public and suggest appropriate action in terms of the Companies Act and SEBI Act after necessary investigations.
Formed in 1999, the CMC identified 238 vanishing companies: 229 by March 2001 and another nine in 2007. All 238 companies’ initial public offerings (IPOs) were issued during 1992 to 1999.
The JPC’s attention was drawn on vanishing companies by Midas Touch during its deposition. In its report submitted to the Parliament in 2002, JPC stated:
14.28 Pointing out that investors have lost confidence due to the happenings in the last decade in the stock market, a representative of Midas Touch Investors Association (Virendra Jain) cited the case of vanishing companies and said:
“In the years immediately after liberalization, 1.5 crore new investors, small investors as we call them, came into the market between 1992 and 1996 through IPOs. They were duped. At that time Rs86,000 crore were raised in four years through public issues and right issues by four thousand odd companies. Most of these 1.5 crore investors who came in for the first time in the stock market were duped…… Till date 229 companies (only) have been identified by the Government appointed monitoring committee, as having made public issues and disappeared. No one has been arrested and no money has been recovered. There has not been even an action plan as to how to recover that money.”
JPC report further stated:
“11.42 The Committee note that the action by SEBI and DCA has enabled the tracing of 160 out of 229 companies which were earlier treated as vanished. There are still 69 companies, which remain untraced.”
Since then, the issue of vanishing companies has been raised during the Question Hour of Lok Sabha and Rajya Sabha over 150 times. The data given in the replies has virtually been the same!
(On Midas Touch request, it was raised for the first time on 20 December 1996 in the Lok Sabha question no. 4432 by Capt. Jagat Vir Singh Drona, MP from Kanpur:
"The number of companies, which made their public issue in 1992 and onwards and are not traceable?" The minister replied that the information is being collected and shall be submitted in due course.)
The latest written replies to un-starred question (no.415) in Lok Sabha on 11 July 2014 by Nirmala Sitharaman, the Minister of State for Finance and Corporate Affairs and to un-starred question (no.1741) in Rajya Sabha on 9 December 2014 by Arun Jaitley, Minister of Corporate Affairs were identical. As per practice of last 12 years, the data of vanishing companies given to Parliament is same: Companies Identified initially: 229 & 238 (since 2007) & Vanishing: 69 and 78(since 2007). The replies were:
(a) A total of 238 companies which had raised funds through Public issues were initially identified as ‘vanishing companies’ as they had stopped filing documents/ balance sheets with the regulators and were untraceable. Out of these, 128 companies were removed from this category and placed under a ‘watch list’, as these companies had started filing their documents/ balance sheets, etc. In addition, 32 companies are presently under liquidation. Thus, as on date, there are 78 companies, which remain in the list of ‘vanishing companies’.
Besides the question hour, vanishing companies issue was on the agenda of Parliamentary Standing Committee on Finance for over 10 years and discussed at length in their meetings. The CMC and Task Forces cumulatively have conducted over 150 meetings between 1999 and 2013.
Further, Midas Touch had submitted three lists totalling 913 companies for inclusion in vanishing companies list after examination: 161 companies in 2012, 604 and 148 companies in earlier lists, which the CMC in its minutes of meetings, held in 2006 and 2007, stated that over 50 companies have been identified for inclusion and rest are under examination. However, we never got any response and none of the company added subsequently in the list. We estimate that over three thousand listed companies have disappeared.
Then why, at the end of the day, after such a massive exercise and expenses, by the executive, parliament and High Court’s order does CMC have so little to show? In terms of (a) number of vanishing companies identified and (b) recovery of money siphoned off and return to its shareholders?
Firstly, CMC and Task Forces constitutes, with few exceptions, of those whose failure - to monitor listed companies and enforce law- enabled predatory promoters’ companies to vanish. The Allahabad High Court trust in CMC was misplaced. Supreme Court has followed different principle-entrusting the probe to Central Bureau of Investigation (CBI) and or Special Investigation Team (SIT)- in recent scams and it has yielded results e.g. In Saradha scam, arrests of those suspected of aiding, abetting and sharing the booty with scamsters and recovery of money looted has begun.
Second, in a democracy, it is the Parliament’s, and not Judiciaries’, prerogative and constitutional obligation to keep an oversight over the executive.
Oversight of the executive is one of the important function entrusted to Parliament under the Indian Constitution. This enables the Parliament to hold government accountable and prevent unconstitutional policies and action on part of the government.
To carry out this task effectively, Parliament has two crucial instruments at its disposal viz. (a) “Questions” and “Debates in the Parliament” and (b) “Parliamentary Committees” which can scrutinise government policies and action.
However, answers given, in the question hour, and, discussions on Parliamentary Committees, on vanishing companies- spread over last twelve years- has exposed the fundamental shortcomings of system and processes adopted for parliamentary oversight of the executive. Resultantly, it has made Parliament largely dysfunctional on this score.
Wide-ranging reforms are required for an effective parliamentary oversight (which may be dealt in next article). These include, but the suggestions are not limited to:
• Reforming Question Hour processes: Apprising the concerned MP, in advance, of the
background of the issue raised and answers given, if any, in last two years of the question raised.
• Parliamentary Committee meetings: Be open to public; Institutional mechanism be evolved for public and NGOs participation along with concerned officials/executive.
• Introducing oversight on Regulators: Presently, regulators are not directly accountable to the parliament. Mechanism for transparent oversight of regulators should be prescribed for institutionalising all stakeholders’ participation.
is Founder & President of Midas Touch Investors Association and had filed a litigation on the Rs1 lakh crore loss to investors on account of suspended companies and has also intervened in the PIL against SEBI’s consent orders which let off law breakers with a small fine)