Sebi orders forensic audit of 2 suspected shell firms

Stepping up its crackdown on suspected shell companies, market regulator Sebi has ordered forensic audit of two listed firms -- Kavit Industries and GV Films -- even as it eased some trading curbs on their shares.

In case of GV Films, the regulator said the "balance sheet is disproportionate to the profit and loss of the company" which warrants an independent audit of its asset and liability, even as "there appears to be no prima facie evidence of misuse of the books of the company".

Regarding Kavit Industries, Sebi said there is prima facie evidence of misrepresentations by the company and violation of listing norms, as also about misuse of funds and books of accounts.

Stating that the company's directors and top management have failed to discharge their fiduciary responsibilities, the regulator said they are "prima facie liable for action by Sebi and should not be permitted to exit the company at the cost of innocent shareholders".

Besides ordering a forensic audit, Sebi also barred Kavit's promoters and directors from selling the company shares, though they can purchase the scrips.

Kavit and GV Films, where trading would now be allowed with applicable price bands and in trade-to-trade category, are among the firms against whom Sebi initiated action last month, by ordering trading restrictions, following receipt of a list of 331 "suspected shell companies" from the government.

The ordered trade restrictions -- allowing trade only once a month and that too for only buy transactions with a 200 per cent security deposit -- were revoked in some cases following appeals filed by them with the Securities Appellate Tribunal, but Sebi was asked to continue with its probe and pass its orders expeditiously.

Continuing with its probe, Sebi has now passed interim directions in case of GV Films and Kavit Industries, while more such orders are expected for several others.

Sebi received the list from the Ministry of Corporate Affairs (MCA) on June 9, wherein it was asked to initiate necessary action under its regulations. The MCA also shared with Sebi a letter from Serious Fraud Investigation Office (SFIO), containing the database of shell companies along with their inputs.

Sebi found that the companies identified as shell companies by SFIO and MCA were potentially involved in misrepresentation including of their financials and business in violation of listing regulations.

Besides, Sebi was of the view that they were possibly misusing the books of accounts and funds of the companies including by facilitating "accommodation entries to the detriment of minority shareholders", thus reneging on the fiduciary responsibility cast on the board, controlling shareholders and the key management personnel.

Accordingly, Sebi took "pre-emptive interim measures" on August 7 by placing trading restrictions on promoters and directors of the listed shell companies, including Kavit Industries and GV Films, so that they do not exit the firms.

The trading restrictions ensured that trading in those shares was not suspended, but allowed under strict monitoring so that the investors could take informed investment decisions till Sebi and the exchanges completed their detailed probes, the regulator said in separate orders on the two firms.

While the exchanges initiated the action, as suggested by Sebi, on August 7 itself, the regulator further on August 9 asked the bourses to submit a report after seeking auditor's certificate from all such companies, providing the status of the companies' compliance requirements with the Companies Act and with listing regulations to ascertain whether they were 'going concern' and what was the business model.

While some firms approached the SAT against being tagged as "shell companies", the regulator was also asked to expedite its probe and pass necessary orders after hearing them out.

After looking into the submissions made by the company and also the report submitted by BSE, Sebi's Whole Time Member Madhabi Puri Buch said in her order on Kavit Industries that the company has not recovered any interest on certain loans which was "given at specific request and friendly guarantee by some common business friend".

Also, the bank statements showed transactions that did not appear to be in the normal course of business and raised serious questions given the previous case of misuse of funds.

Besides, the company disclosed a sudden spurt in revenue and trade receivables for 2016-17, which Sebi said "prima facie raises doubt on the genuineness of these transactions".

Sebi also suspected "misrepresentation" by the company after it observed discrepancies in investment figures disclosed by the company in its annual reports and in its submissions before the regulator.

Stating that a detailed examination needs to be undertaken to unearth the entire extent of violations, Buch directed the BSE to appoint an independent auditor to conduct a forensic audit of Kavit Industries for checking credentials and financials of the company.

A similar order was passed by Buch in case of GV Films and both the companies have also been asked to submit their replies or objections to the interim directions within 21 days.

In case of GV Films, Sebi has revoked the restriction on transfer of shares held by the promoters and directors.

After looking into submissions made by GV Films against being tagged as a shell company and the BSE report on it, Sebi said the company did not have any "substantial business model in terms of revenue and profit".

GV Films' standalone revenue stood at Rs 5.68 crore in FY15, fell to Rs 3.36 crore in FY16 and further to nil in FY17, Sebi said, while observing that it had no other revenue stream to support expenditure of about Rs 9 crore and was incurring losses year after year.

Besides, the company made investments in shares of a subsidiary company to the tune of Rs 15.05 crore even as its networth was getting eroded over years.

"The financials of the company is dominated by current liabilities of Rs 96.87 crore against which total assets of Rs 118.73 crore are shown which are disproportionate to the income and expenditure of the company.

"Thus in the interest of the shareholders, the true status of these assets needs to be verified. However, there is no prima facie evidence of misrepresentation of the financials of the company," Sebi said.