Just as one was about to laud the Securities & Exchange Board of India (SEBI) for a couple of good decisions (on hurdle fee for holders of participatory notes and reporting loan defaults to bourses within a day), it has gone and blotted its copy book rather badly. Chairman Ajay Tyagi is a man in too much of a hurry, and the bombshell that he lobbed on 7th August caused financial loss to investors, damaged reputations, dented market sentiment and underlined the perception that India is a scary place to do business.
On 7th August, SEBI asked the stock exchanges to put 331 companies, which have been identified as ‘shell’ companies, into what is known as stage VI of graded surveillance measure (GSM). This led to an immediate stoppage in trading of their shares. Trades will now be allowed only on the first Monday of each month, on a trade-to-trade basis, that too with a 200% margin that will be impounded for five months. SEBI has also asked stock exchanges to independently verify the credentials of each company and order a forensic audit, if necessary.
There are plenty of shell companies whose share prices are routinely manipulated for tax evasion. So, stringent SEBI action would have been hailed as a significant move to curb money laundering through the markets. But SEBI’s list of 331 includes at least five well-known companies which simply cannot be called shells. They are profitable; pay taxes regularly; and have significant investments from mutual funds and foreign investors. These are: Prakash Industries, J Kumar Infraprojects, Gallant Ispat, Parsvnath Developers and SQS India BFSI.
Some commentators have said that SEBI’s action against the 331 companies was based on findings that the companies, or their subsidiaries, were used to deposit large sums of money during the demonetisation exercise. This was apparently revealed through investigations by the ministry of corporate affairs (MCA). It could well be that over 90% of the 331 companies are, indeed, shady and have indulged in dubious practices. It is also possible that SEBI has something on the five large ones which are actively traded and are not shell companies. But that still does not give SEBI the right to issue reckless orders that cause serious financial losses to hapless investors who are caught in the crossfire. We now know that SEBI did not investigate at all.
It is 25 years since SEBI got its statutory teeth; long enough for it to be imprinted into the organisational DNA that investigations must be thorough, follow a process of natural justice (such as sending a show-cause notice and seeking an explanation) and must not harm public shareholders who invest on the basis of published information. And, yet, summary orders that shut down businesses of market intermediaries is the norm in India. According to a former regulator, “SEBI has routinely issued such orders against brokers, but nobody cared. There is a lot of outrage this time only because investors are affected and the impact is seen in the fall in stock prices.” This SEBI action is not even a proper regulatory order; it is a letter from a chief general manager (CGM) ordering the bourses to comply. This particular CGM, apparently, has a history of issuing rash orders; but he is supervised by an executive director who has been with SEBI long enough to have shown more restraint. The tragedy is that SEBI gets away with such capricious actions because aggrieved stakeholders and investors have little scope for redress.
The securities appellate tribunal (SAT) rarely pulls up the regulator. Even in the worst cases, the best outcome from SAT is that the issue is remanded back to SEBI for action. Even in the rare instances when SAT had been angry enough to rip up SEBI officials and hold them accountable, it was quick to condone after an apology. At the time of writing, several companies have rushed to SAT for redress and the regulator has also called for a review meeting after a thorough bashing from the media. Hopefully, it will lead to a rare self-correction from the regulator, to mitigate the damage caused.
The media have reported that SEBI’s action is based on information provided by MCA which, in turn, is based on investigations by the serious frauds investigation office (SFIO). If true, there is a bigger problem here. MCA, which has never won laurels for efficiency, has been dashing off some extraordinary notices and filing litigation with absolutely no homework.
Sometime in mid-July, two constables with a legal summons, landed up at the door of a noted Mumbai activist, who decided to retire 13 years ago by selling his business to a large listed company (it comprised two manufacturing units). The notice showed that a ‘criminal’ case had been filed against him and a director alleging that his companies had not complied with statutory filings. This raises three issues. First, all statutory requirements were complied with at the time of the sale; where did the records vanish? Secondly, the units were sold over a decade ago—probably outside the law of limitation—does it make sense to file a criminal case? Third, if MCA’s objective was to weed out shell companies, isn’t it only clogging courts, increasing costs and harassing people through such false and extreme action? The activist is emphatic that he has not received any notice from MCA, so what should have been settled by a simple query will have to be settled in court because of MCA’s sloppiness.
Deena Mehta, a former vice-president of the Bombay Stock Exchange (BSE), narrated her own experience during a television discussion. She has received a notice in connection with a company that has been merged with her firm 20 years ago. Her case sounds suspiciously like the notice received by the activist and is of an earlier vintage. It exposes a frightening mess in the records of the MCA and the arrogance to send out notices without due diligence. There is more.
As I was writing this, a former regulatory official told me how he has received repeated questionnaires and even a personal visit by someone from a ‘department of statistics’ of the government about a company in which he and his wife are directors. The questions relate to income, expenses, bank accounts, number of employees, etc. What is troubling about this is that the company has been filing its returns regularly and the data is available on the MCA21 website. Although it has no business, except for some funds kept in fixed deposits, the filings should make it clear that it has not been used to route illegal funds either. The bigger issue is: What exactly is the remit of the department of statistics? What are its powers? As far as we know, there is no legal requirement for any enterprise to file information with the department of statistics.
We have no way of knowing how many such notices have been dispatched. Prime minister Narendra Modi told chartered accountants recently that 100,000 companies had been cancelled and 37,000 shell companies had been detected. How many in that list are cases like the ones mentioned above? Isn’t all this sheer harassment? Are we being subjected to this in the name of cleaning up black money? The objective may be laudable, but the ordinary entrepreneur, especially the small businessmen, cannot be victimised and harassed because of the lack of diligence, investigation by regulators and shoddy record-keeping of government agencies. Most Indians were supportive of demonetisation and bore the suffering that it unleashed with stoic acceptance. Their patience then is not a licence for repeated assaults by government agencies that have absolutely no accountability because the slow and expensive legal system does not work for ordinary people. Such harassment only underlines the fact that India is a very difficult place to do business and its capital markets are prone to regulatory risks that could arise, both out of poor supervision and the excesses by regulatory agencies.
But why they have not any action on union bank of India which did not report the 171 million fraudulent withdrawal from its nostro account. to the stock exchanges for more than a year. It appeared in news only after it is recovered.
No doubt there have been some good moves of SEBI too. But in my judgement (i may be wrong) , majority of the actions taken by SEBI/BSE such as Periodic Call Auction System, Price Bands, GSM, S+ , Compulsory De-listing (which basically leaves the investor to track down & chase the promoters to get the exit price) etc have caused much more pain to the investor than to the market manipulators, operators & rogue promoters.
, the overall picture in the minds of investors .
I hope that SEBI deliberates at length about the practical problems faced by the retail investor & takes remedial action on some of the issues i have mentioned above.
And this way the brokerages can manipulate the market. The squaring off on6 th day also has cost small investors. If you have margin why you have to square off. Further compulsory settlement of securities periodically also affects trading opportunities. Just because they don't want to punish the guilty brokerages they punish small investors.