Companies listed exclusively on closed regional exchanges to re-list
Virendra Jain of Midas Touch Investors Association may have won yet another battle for marginalised retail investors, without even having to file a public interest litigation (PIL) this time.
In June 2014, we had reported how Mr Jain had sent a strongly worded letter to UK Sinha, chairman of the Securities & Exchange Board of India (SEBI) on behalf of investors of companies that were listed exclusively on regional stock exchanges (RSEs) that were being derecognised by the regulator. He claimed that the exit option for such investors, mandated by SEBI, was not being implemented. Among the 17 regional exchanges to be shut down, many, such as Pune, Kochi, Delhi, Vadodara and Ahmedabad, have already been de-notified. SEBI’s circulars in 2008, 2012 and 2014, which spelt out the de-notification process, had said that companies listed exclusively on RSEs should either get listed on national bourses or go for mandatory de-listing by giving an exit price to investors.
However, Mr Jain alleges that SEBI had not bothered to ensure that the re-listing process was properly instituted and completed before permitting the exchanges to close. His letter pointed out that most RSEs had significant assets (property) and valuable reserves built through tax concessions granted by the government; these should be equitably distributed among all stakeholders including investors. This meant that, although companies that would be de-listed may not want to offer an exit to investors, this should not stop the stock exchanges from doing so. This would, however, be a difficult exercise, since many companies listed only on RSEs have already vanished; but there are some profitable companies as well.
Data going back to 2002 suggest that there are 4,644 companies listed exclusively on RSEs. For the past two decades, Mr Jain has been doggedly fighting the apathy of SEBI and the ministry of corporate affairs in tracing companies which vanished with investors’ money in the primary market mania of the early 1990s. He believes that the investment bankers and chartered accountants of such companies should, at least, be held accountable for helping to cheat investors. But regulators are reluctant to act.
Midas Touch followed up its letter to SEBI with a final legal notice indicating that it planned legal action. On 17th April, SEBI finally issued a circular to bourses to protect investors of RSE-listed companies. According to SEBI, RSE-listed companies have pleaded that “although they are interested and eligible to migrate to the main boards of nationwide stock exchanges, they are not in a position to opt for the same due to paucity of time.” SEBI has now given them 18 months to complete the formalities and compliances involved in listing on national stock exchanges.
SEBI’s de-listing circulars of 2012 and 2014 had said that companies that were exclusively listed on RSEs would be moved to ‘dissemination boards’ of national exchanges. It then went ahead and de-notified some exchanges. But, now that it has granted the companies 18 months to get listed on national bourses, it needed to relax some compliance rules as well. There are 274 companies on the dissemination boards of national exchanges. The dissemination board is like a transition point allowing some form of direct sale and purchase of shares until the companies are formally listed on the national bourses.
If companies on the board have filed returns with the RoC (registrar of companies) for the past two financial years, they would be treated as compliant, based on a certificate from an independent professional, and be given direct listing without the need for a ‘no objection certificate’. The national exchanges would conduct an independent verification. SEBI further says that if such RSE-listed companies do not make an effort to get listed, or provide a proper exit option to retail investors in 18 months, their promoters and directors will face stricter scrutiny with regard to their future association with the securities market. SEBI may also initiate action against them. However, companies on the dissemination board, whose promoters cannot be traced, will be removed from the list after the RoC declares them as ‘vanishing companies’. This detailed re-listing process probably makes Mr Jain’s PIL redundant, but he and other investors and activists may want to keep an eye open to see if SEBI’s orders are actually complied with in the specified time.