SEBI's order on shell companies

What is the issue?

The recent order of SEBI to suspend the trading of suspected shell companies is alleged to be a baseless decision without any proper investigation.

What is the case?

• A shell company serves as a medium for business transactions without itself having any significant assets or operations.
• They are also used for tax evasion or tax avoidance.
• The Ministry of Corporate Affairs shared a list of 331 listed companies that are suspected to be shell entities.
• This was after consultations with the Serious Fraud Investigation Office and the Income Tax department.
• It directed SEBI to investigate the companies and take necessary action against them under the SEBI Act.
• SEBI, subsequently, ordered to suspend trading in 331 suspected shell companies’ shares.
• It also placed them on a strict watch under its Graded Surveillance Measure (GSM) framework.
• Following this, the Securities Appellate Tribunal (SAT) has ordered the lifting of the trading restrictions imposed on two of the 331 companies.
• SAT has also questioned SEBI for passing an order “without any investigation”.

What was SEBI's rationale?

• It is suspected that trading on the shares of these “shell” companies was used as a way to launder black money.
• Since demonetisation the Centre has deregistered well over 1,60,000 dormant companies, identified over 37,000 shell firms and over 3,00,000 firms engaged in suspicious dealings.
• The decision comes as a measure to ensure a sound business environment.

What is the impact?

• The government’s resolve to act against dodgy companies is valid.
• However, the present move has failed to give  suspect companies an adequate chance to explain their positions.
• Not all shell companies are illegal. Some were formed to raise funds to promote start-ups.
• The economic costs of freezing the trading are disproportionate with the proposed benefits of such action as stocks witnessed a sharp fall after the order.
• A hasty order without an independent investigation has dealt a serious blow to SEBI's credibility.
• Though, the SAT order has brought some fairness to the entire proceedings, SEBI and the government must give a convincing rationale behind their actions.

Quick Facts

SEBI

• The Securities and Exchange Board of India (SEBI) is responsible for protecting the interests of investors in securities, to promote and to regulate the securities market.

SAT

• Securities Appellate Tribunal (SAT) is a statutory body established under the provisions of Securities and Exchange Board of India Act, 1992.
• It is a three-member tribunal to hear and dispose appeals against orders passed by the Securities and Exchange Board of India.
• A second appeal lies directly to the Supreme Court.

Graded Surveillance Measure (GSM)

• SEBI and stock exchanges had introduced the graded surveillance measure framework which came into force from March, 2017.
• This is to monitor securities which have witnessed abnormal price rise not commensurate with their financial health and other fundamentals.
• SEBI may lay additional restrictions on market participants dealing in identified securities subject to the satisfaction of certain criteria.
•  At present, there are six stages defined under GSM framework. Surveillance action has been defined for each stage.

Source: The Hindu