Sector watchdog Sebi’s move suspending trading in 331 listed entities suspected to be shell companies rattled markets. The list was apparently forwarded by the Ministry of Corporate Affairs, based on inputs from the I-T Department, SFIO and other agencies. This is the largest such crackdown in Sebi’s history. Market watchers argue the move was against the principles of natural justice as the regulator neither defined the basis of selection nor were companies given a chance to explain themselves.
Some firms moved the SAT seeking a stay on trade restrictions and refuted the ‘shell company’ tag citing profits and financial reporting records. But it’s proven that the Indian accounting systems are prone to manipulations and Sebi’s insistence on an independent forensic audit isn’t out of place.
The existence of shell companies is not recent or limited to India.
The 2016 Panama papers exposed startling revelations, where just one firm, Mossack Fonseca, operated via 2.5 lakh shell companies. The I-T department’s investigation following demonetisation revealed that nearly 200 shell companies facilitated the conversion of illegal money aggregating Rs 3,900 crore. The SFIO filed prosecutions against 49 firms, while the Enforcement Directorate initiated proceedings against 300 firms. While demonetisation exposed the widespread misuse of dormant entities, the SIT flagged the issue way back in 2015. In fact, in the past, Sebi itself barred over 250 entities for suspected tax evasion.
The latest move seems preventive, but there’s widespread criticism about the manner of execution. The directive was neither backed by a legal provision that authorises Sebi to delegate such powers to exchanges and is considered in variance with Sebi (Delisting of Equity Shares) Regulations, 2009. Optimists insist Sebi can make exceptions in the greater interest of shareholders. While the intent seems honourable, the burden of proof is solely on the regulator, failing which companies, genuine or otherwise, will play the innocent-unless-proven-guilty card.