Shell companies: Sebi panel to look into complaints of errors in classification

Mumbai: The Securities and Exchange Board of India (Sebi) has formed a committee to hear cases of firms (and their directors) that have complained that they have been classified as shell companies because of technical errors, said two people with direct knowledge.

The panel will be a sub-committee of the capital market regulator’s secondary market and advisory committee (SMAC).

“For genuine cases of small technical errors or mis-interpretation, the sub-committee will make representations or help companies to make representations to the ministry of company affairs (MCA) for relief,” said one of the people cited earlier, a member of Sebi SMAC.

A Sebi spokesperson did not respond to an email seeking comment.

At least 500 listed companies have been impacted after the MCA disqualified directors in September. These companies share directors who have been disqualified for associating with other firms which haven’t filed their financial statements or annual returns for three years.

Mint had reported on 10 October that stock exchanges have sent out notices to these firms seeking an explanation on why their directors were disqualified and how do they plan to replace them.

Sebi’s move comes after some directors approached the courts for relief. A group of senior executives in big automakers were granted an interim relief by Delhi high court on 10 October after they approached the court on finding themselves in the list of directors disqualified by the ministry of corporate affairs (MCA). Separately, the Delhi high court has issued notice to MCA asking whether the ministry has used the Companies Act provisions retrospectively.

“Not all companies have the wherewithal to approach courts for relief. If Sebi can help some of these companies who are in the cross hairs through no fault of theirs, then it will help in preventing the situation from spiralling further,” said the second person cited earlier.

The sub-committee is also tasked with handling the 330 suspected shell companies which were put by Sebi under increased surveillance measures after receiving a letter from MCA, this person added.

In some of these cases, Sebi whole-time member Madhabi Puri Buch has ordered a forensic audit. In several other firms, trading restrictions have been lifted as the regulator did not find companies to be shell structures or in violations of securities law. At least eight companies were able to secure relief from the Securities Appellate Tribunal.

For the companies that need to be investigated further, the regulator is finalizing terms of reference for a forensic audit, said the second person.

According to Sandeep Parekh, founder of law firm Finsec Law Advisors, the sub-committee should focus on violation of securities and companies laws.

“As it is no offence to be a shell company, the framing of the charge and a specific allegation needs to be properly crafted. Since, restrictions cannot be retrospectively imposed for a violation which did not exist at the time of the offence, they will probably need to withdraw allegations of shell company-hood and take action based on violations of securities or corporate laws,” said Parekh.

The Sebi sub-committee is also considering enhancing surveillance on firms with daily average turnover of less than 1% and less than Rs10 crore of free float market capitalization. A Sebi committee analysis shows that these companies are more susceptible to manipulation, said the SMAC member cited earlier.