The company’s scrip is languishing. It has been slapped with a show-cause notice for alleged market manipulation. So why is it in such a privileged index?   

Himachal Futuristic Communications Ltd (HFCL) continues to be part of an elite group of companies-in the S&P CNX 500 index made up of 500 select companies listed on the National Stock Exchange (NSE). The index is a benchmark of 'quality' companies of a certain size and liquidity.

Why is HFCL still in this list? Its stock price is languishing at its current level for the past six years. Its business model is not exactly robust. In February 2010, market regulator Securities and Exchange Board of India (SEBI) disposed the case against the company for which the company had to cough up Rs10 crore under the consent order.

The case dates back to the 1999-2001 period of the Ketan Parekh scam. Mr Parekh, the main accused in the fraud, allegedly rigged share prices of 10 companies in cahoots with various promoters, including HFCL. In 2001, SEBI had told the Joint Parliamentary Committee investigating the scandal that Zee and HFCL had diverted Rs515 crore and Rs700 crore, respectively, to Mr Parekh.

A show-cause notice was sent to the directors and associates of the company in 2004 by SEBI. While the proceedings were in progress, on 31 May 2008 and 4 June 2008, HFCL proposed a settlement of the proceedings through a consent order.

SEBI then constituted a high-powered committee which also recommended settling the issue if the applicants agreed to make payment of Rs10 crore towards settlement charges.

Despite this, the company remains a part of the S&P CNX 500. According to a report in November 2010 of the Economic Times, the Society for Consumers' and Investors' Protection, a Delhi based not-for-profit organisation, complained to SEBI, alleging HFCL's acquisition in a private firm Sunvision Engineering Company was a ploy by the promoters to raise their stake in the company.

Apart from a minimum listing record of six months on the exchange and minimum record of three years of positive net worth, market capitalisation, industry representation, trading interest and overall financial performance are the criteria for the selection of a company in the NSE CNX S&P 500 index.

HFCL is also widely seen to be fronting for Reliance Industries. Infotel Broadband Service, a tiny Internet services provider-promoted by Anant Nahata, son of HFCL promoter Mahendra Nahata-was the only winner of the pan-India license for broadband wireless access a few months ago. Within a few days, Reliance Industries announced that it would acquire 95% stake in Infotel Broadband, making a re-entry into the Indian telecom market.

A detailed email was sent to NSE questioning the reasons for inclusion of HFCL in the NSE CNX S&P 500 index, but Moneylife has yet to receive a reply till the time of writing this piece.

Since index funds are supposed to follow indexes mechanically, poor quality of stocks in an index forces these funds to buy such companies blindly. Unfortunately, it is not just NSE 500 that is flawed, but even the elite Nifty 50 and also the quality of companies included in the derivatives segment.