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SEBI Initiates Action Against Suspected Shell Companies In India

India’s securities regulator, the Securities and Exchange Board of India (Sebi) has asked the country’s stock exchanges to start action against 331 listed units suspected to be shell companies.

Sebi’s circular has also ruled that the companies would not be allowed to trade this month.

The markets reacted negatively to the announcement with the Bombay Stock Exchange (BSE) falling by more than 0.5 percent while the National Stock Exchange’s Nifty was down 0.48 percent.

According to SEBI’s order, the 331 shares identified will be put under stage four of the Graded Surveillance Mechanism (GSM). This means that these stocks can be traded only once a month. SEBI has stated that trading in the said shares will be done only on the first Monday of every month.

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The companies had been identified by the corporate affairs ministry and forwarded to SEBI for further action in July. After the demonetization drive, a special committee had isolated companies having high investments from layering, and fund infusions from unlisted shell companies. As per the BSE, the total value of the companies is in the region of Rs 12,000 crore.

As a part of the stage 4 GSM, the companies are likely to undergo an independent audit and a forensic audit that will review the companies’ credentials and financials. The companies face compulsory delisting if the reviews find a lack of appropriate credentials or fundamentals.

The corporate affairs ministry has already cancelled the registration of over 1.6 lakh companies during the last 7 months as their business activities were being conducted in a manner that did not prevent money laundering from occurring. Several large companies feature in the latest list including Prakash Industries, Gallant Ispat, Parsvnath Developers, J Kumar Infra, Pincon Spirits and Adhunik industries.

Pincon Spirits and Prakash Industries have both responded to the BSE disputing the charge that they were shell companies pointing out to their robust financials and share trading levels on the exchanges. Analysts have questioned the process used to identify these companies.

In a statement Amit Tandon, founder and managing director of Institutional Investor Advisory Services, a proxy advisory firm said,

Three hundred and thirty one companies is a fairly large number, makes up 7 percent of total listed companies. The question is what process was followed before Sebi issued this missive. Assuming this comes at the back of the drive to curb black money and that some criterion was followed to crack down on these companies, it should be disclosed

Tandon went on to say that ideally the companies should have been first reviewed before being put under restricted trading.


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