Spooked by the sudden decision by market regulator Securities and Exchange Board of India (Sebi) to group them with shell (fake) companies, several infrastructure companies, including Parsvnath Developers, JKumar Infraprojects and Prakash Industries on Wednesday moved the Securities Appellate Tribunal (SAT) contesting the "shell company" tag.
While several other firms in the Sebi list of 331 "suspected shell companies", are expected to challenge the freeze on trading in these scrips, Sebi has defended its move, saying that it took the action after receiving the list of companies from the corporate affairs ministry.
Of the 331 companies that Sebi has sought action against at least 167 are listed on Bombay Stock Exchange (BSE).
A report by the Economic Times for 154 of these firms show one-third of them, have been reporting losses for four consecutive years now. Over two dozens of them reported zero sales for last financial year. Yet, retail and high net worth individuals (HNIs) hold up to 95 per cent stake in these companies.
Despite this, the stocks of such companies have surged as much 188 per cent in the financial year 2017, according to the ET report.
The market regulator on Wednesday asked the bourses to examine tax returns and financial details of these suspected entities for last three years.
Defending their status, JKumar Infraprojects and Prakash Industries told SAT that their businesses are legitimate and that they are not shell companies.
The companies also submitted that the regulator got the information from the corporate affairs ministry and subsequently asked the exchanges to investigate and take action without making any investigation.
According to the submissions, the list of 331 companies was received by Sebi on 9 June and the circular was issued on 7 August. The tribunal has asked Sebi as to why the matter was not investigated before issuing the circular.
The tribunal wanted to know what action was taken during the intervening period. The regulator is expected to give its reply today.
The hearing at the tribunal has been adjourned till Thursday (today).
The companies have named the exchanges as opposite parties.
Sebi has asked the exchanges to restrict trading in shares of 331 "suspected shell companies", some of which have investments by several well-known domestic and foreign investors.
The BSE on Wednesday imposed maximum trading curbs on five remaining firms from Sebi's list of 331 suspected shell companies. With the latest move, the exchange has expanded the restrictions to a total of 167 stocks. Out of the list, trading in 164 companies was already suspended for various penal reasons or as part of surveillance measures, before Sebi issued directions to the stock exchanges seeking actions against 331 firms, alleged to have indulged in tax-related and other violations.
In a statement, the National Stock Exchange (NSE) said it has started collecting information about the 48 firms that are listed on its platform, out of the list of 331 companies. Out of the 331 companies, shares of more than 160 firms are actively traded on the exchanges.
"We have filed an appeal before SAT. Our plea is to set aside the Sebi order. We are not a shell company and we have complied with all the rules and regulations and not evaded any tax," Parsvnath chairman Pradeep Jain said.
On Tuesday, many of the companies tagged annual reports and other financials along with their filings to press upon the exchanges that they are not shell companies and are in compliance with all regulations.
"We are shocked to find our company's name amongst the list of suspected shell companies as a result of which, our equity shares...are being shifted to GSM VI on the stock exchanges. As a result, our company's securities may be traded only once in a month on a trade to trade basis and Sebi has envisaged a "financial audit" thereby implicitly castigating us and tarnishing our reputation," Parsvnath had said.
Similarly, J Kumar Infraprojects had said it is not a shell company and suspicion of the regulator is uncalled for.
Prakash Industries had also said that directions issued by Sebi are "totally devoid of merit and uncalled for. Besides, there has never been an occasion when our company has indulged in any kind of malpractices in stock market".
In a letter dated 7 August 2017, Sebi instructed stock exchanges to deactivate trading in the 331 shell companies. Trading in these scrips has been barred and investors will not be able to buy or sell these stocks. (See: Sebi bans trading in shares of 331 suspected shell companies).
Apart from initiating a "process of verifying the credentials/fundamentals of such companies", the exchanges have also been asked to appoint an independent auditor to carry out audit of these entities. If necessary, even forensic audit could be ordered to verify their credentials and fundamentals.