Shell companies tag: Three firms move SAT against Sebi order

[JKumar Infraprojects, Prakash Industries, Parsvnath Developers have filed with SAT petitions against Sebi order naming them suspected shell companies]

Three companies—J Kumar Infraprojects Ltd, Prakash Industries Ltd and Parsvnath Developers Ltd—on Wednesday approached the Securities Appellate Tribunal (SAT) against their inclusion in a list of 331 suspected shell firms against which the market regulator sought action by stock exchanges.

Markets regulator Securities and Exchange Board of India ( Sebi) has directed stock exchanges on August 7, 2017 to take action against 331 suspected shell companies that are listed on the bourses.

As part of efforts to curb black money menace, Sebi has said these scrips would not be available for trading this month. These stocks stopped trading on the bourses from Tuesday.
Shell companies are dubious entities that are generally used for laundering illegal funds. However, the term ‘shell company’ is not defined under the Companies Act. 
According to BSE, trading in all such listed securities shall be placed in Stage VI of the graded surveillance measure (GSM) with immediate effect. If any listed company out of the said list is already identified under any stage of GSM, it shall also be moved to GSM Stage VI directly.

Sebi's restrictions on trading in 331 stocks have impacted about 36 lakh investors. These include some big names, such as Rakesh Jhunjhunwala, DSP Blackrock, HDFC Mutual, Reliance Mutual and UTI among domestic investors. Foreign institutions like Goldman Sachs, Fidelity, Blackrock and Smallcap World too are holders of some of these stocks. 

J KUMAR INFRA 
The Mumbai-based company, which recently won the government contract of Mumbai Metro III rail, has over 25,300 retail investors as on June 2017 including HDFC AMC (3.7%), Goldman Sachs (3.6%), Smallcap World Fund (5.4%), UTI (2.5%) and Blackrock (1.96%). The stock has given a return of 38% so far this year.

Company Response: J Kumar Infra is not a shell company and the suspicion of the regulator is uncalled for. We are rated IND A+ for fund-based limit, IND A1+ for non-fund-based limit and IND A1+ for commercial paper by India Ratings. 

PRAKASH INDUSTRIES 
Prakash Industries, which rose 207% so far this year, has a strong balance sheet. As on June 2017, there were 48,000 shareholders including BNP ParibasBSE -2.15 % (3.4%), Sunidhi Capital (2%) and Rakesh Jhunjhunwala (1%). 

Company Response: We are not a shell company; we are a healthy profit-making company with an annual turnover of over Rs 2,400 cr and profi t of Rs 78 crore for FY2016-17. 

PARSVNATH DEVELOPERS 
Delhi-based real estate company has 1.96 lakh pubic shareholders including Fidelity (4.17%), ITF Mauritius (2.3%), Anand Rathi (2.1%) and Religare Finvest (1.04%). 

Company Response: We are shocked to see our company on the list of suspected shell companies. The direction issued by Sebi in terms of the letter under reference is completely uncalled for and is without any basis. We have never ever indulged in any malpractice on the stock exchange.

SAT heard the pleas filed by J Kumar and Prakash Industries, but the petition filed by Parsvnath Developers did not come up for hearing. SAT will continue hearing the matter on Thursday. 

SAT, in its initial observations, said Sebi should offer a clarification on the provisions used to direct stock exchanges to act against the 331 companies and hear out those making representations to the regulator. According to Sebi’s Monday night directive, shares of these companies will be traded only once a month until stock exchanges ascertain whether they are genuine entities or structures meant for fund diversion and tax evasion.

The three companies that approached SAT are among the biggest of the 331, only 162 of which were actively traded; the rest had already been suspended.

J Kumar Infraprojects had a market capitalization of Rs 2,146 crore, Parsvnath Developers Rs1,020.5 crore and Prakash Industries Rs2,119.86 crore. 

During Wednesday’s hearing, Janak Dwarkadas, arguing for J Kumar, said Sebi’s direction was arbitrary and unreasonable. Senior advocate Pradeep Sancheti appeared on behalf of Prakash Industries. 

The companies argued that Sebi, the ministry of corporate affairs (MCA) and the exchanges had not verified whether they are shell companies or not and the principle of natural justice had not been followed. They added that it is not clear what provisions of the Sebi Act had been used to pass the directive.

Sebi’s communication to stock exchanges said its directive was based on a 9 June letter from the MCA identifying these 331 firms. It was not clear how the MCA shortlisted these firms; the list of firms mentioned that the income tax department, serious fraud investigation office and early warning systems played a role. Sebi’s counsel argued that it was a first of its kind order against suspected shell companies. 

“Regulatory action, in the absence of an inquiry, notice and hearing is certainly going to face a challenge as being...presumptive and against the principles of natural justice. Though every company in the Sebi list has been painted with the same brush, on the face of it, there are companies who are generating profits and financial reporting about them is available publicly, they are paying taxes and many of them are publicly servicing government contracts. It is not clear what is a ‘shell company’ and what constitutes ‘credentials/fundamentals of a company’? While the object behind Sebi’s such order is honourable, process is questionable,” Sumit Agrawal, partner, Suvan Law Advisors, who so far doesn’t represent any company on the list.

Yogesh Chande, partner at the law firm Shardul Amarchand Mangaldas, cited a Supreme Court judgement of 7 March, which said Sebi circulars cannot be challenged in SAT because they are part of its administrative function.

"After the judgement of the Hon'ble Supreme Court in the matter of NSDL (National Securities Depository Ltd) it is a settled position that Sebi administrative circulars cannot be challenged. Having said that, Sebi has currently not concluded that these are shell companies and has only referred to them as ‘suspected’ shell companies,” he said. “These companies are still available for trading but under heightened surveillance. Surveillance of any nature is the right available to a stock exchange under its bye laws and regulations, and such a right cannot necessarily be seen as affecting the companies themselves whose securities are listed on stock exchanges.”

(Inputs from Mint)