With investor participation already at abysmally low levels, the SEBI in its hurry and disregard for implications of it actions, may bring another nail down on the retail investor coffin

Virendra Jain of Midas Touch Investors Association sent a strongly worded letter to UK Sinha, chairman of the Securities and Exchange Board of India (SEBI) protesting the exit options provided by the market regulator to regional stock exchanges (RSEs) leaving lakhs of investors in these exchanges in a lurch. According to Jain, none of the guidelines issued by SEBI for RSEs, provide  exit options for shareholders. In fact, none of the processes required for relisting have been probably instituted or overseen by the SEBI, he alleged.

“We once again request that RSEs should be de-recognized only after ensuring protection of interest of investors in companies exclusively listed on them and that (a) The exclusively listed companies on non-compliant stock exchanges have been listed on nation-wide stock exchanges or failing which (b) Such companies are 'compulsorily delisted' by the concerned regional stock exchange and their shareholders have received the exit price in accordance with Section 21 A [Delisting of securities) of the SCR Act and Rules and Regulations framed there under,” Jain said in his letter.

For those wondering what the hue and cry is about, here is the situation as it stands today. The letter states, “According to SEBI data, as on 1 March 2002, about 9,644 companies were listed on 23 stock exchanges all over the country. The number of investors in these companies totalled over two crore. Out of the 9,644 companies, 4,644 companies are exclusively listed on RSEs. The market cap of these companies would be above Rs2 lakh crore.”

Now we come to SEBI's latest directions with respect to these RSEs. SEBI had approved 'Guidelines' that would provide an exit option to RSEs, first on 29 December 2008, with revisions on 30 May 2012, and finally on 22 May 2014. In effect the guidelines set in motion, a process to de-recognise exchanges that had an annual turnover of under Rs1,000 crore before 30 May 2014.

Virendra Jain, in his letter points out that in the December 2009 circular, Paragraph 8 of the circular deals with pre-requisites for the de-recognition of RSEs that did not fulfil the turnover obligations. As quoted in the letter, Paragraph 8 of the guidelines says the following:

“In case of companies exclusively listed on those derecognised stock exchanges, it is mandatory for such companies to”

1. “Either seek listing at other stock exchanges or”
2. “Provide for exit option to the shareholders as per SEBI Delisting Guidelines / Regulations after taking shareholders’ approval for the same, within a time frame, to be specified by SEBI, failing which”

The letter goes on the say that none of these exits for the shareholders have been made available, and none of the processes required for relisting have been instituted or overseen by the SEBI. As always, this leaves the small investor in these companies out in the cold.

“At the outset, we would like to bring it to your notice that issue of 'vanishing companies' was raised by us only, way back in mid-1990s and order along with directions were issued by  Allahabad High Court in 1999 on our public interest litigation (PIL) no659 of 1998. The central monitoring committee (CMC) and Task Forces have been working since then. We are aware of the ineffectiveness of the action taken and their results. For the retail investors, the exercise has been meaningless as none of them got any money back in the companies identified as vanishing nor a single rupee was recovered from such companies and their predatory promoters and directors by SEBI and Ministry Of Corporate Affairs (MCA). Further, the criteria of vanishing companies adopted by CMC is erroneous. No action has been taken by SEBI under the Securities Contracts (Regulation) Act, 1956 (SCR Act) against the companies identified as vanishing and their promoters, directors, Chartered Accountants (CAs) and company secretaries (CSs), ” Jain said in his letter.

Indian regulators, exchanges and intermediaries have never been famous for their investor friendly policies. This latest mess flies in the face of the SEBI “trying to protect investor interests.” Finally, the letter says, “Lastly, the stock exchanges which are in the process of de-recognition have huge assets, which vary from exchange to exchange. Generally, substantial part of these assets/ reserves have been built, over the years, through various concessions, tax rebates/exemptions given by the government and investor services funds etc. We request SEBI to issue detailed guidelines for treatment of these assets, their valuation and equitable distribution amongst all stakeholders. We emphatically demand and hope that SEBI would give meaningful representation to investors association for deliberations on this score.” Here's hoping that the SEBI will act swiftly and equitably in this instance.”

Earlier in March, the investor association raised the issue to non-compliance by companies. It was 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 Midas Touch Investors' Association. The PIL filed in the Delhi High Court alleges, 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 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.

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.