Mandatory buyback could shelter shell-shocked investors from sanskari Sebi’s ban

Shishir AsthanaMoneycontrol Research

One of the roles of Securities and Exchange Board of India (SEBI) as a market regulator is to protect investors. Generally, the regulator does a good job of it but occasionally it overdoes things. In its zeal to protect investors, it ends up harming them.

In keeping with the current trend of curbing black money, SEBI and the Ministry of Corporate Affairs have identified 331 companies as suspected shell companies. The remedy suggested for dealing with these companies was to ban them from trading. The ban was imposed overnight without giving anyone an opportunity to exit. This is a sanskari ban of the type Pahlaj Nihalani made famous in Bollywood as the country’s censor-in-chief.

In the process, the regulator has affected 36 lakh investors including big names like Rakesh Jhunjhunwala and some of the top mutual funds in the country. The immediate question that comes to mind is what were these savvy investors doing in shell companies? Surely, they have the wherewithal to identify one.

The problem seems to be in the classification of what the regulator calls ‘shell companies’. Shell companies are normally those which do not have any business and are used for money-laundering activity.

The list contains companies which are dividend paying as well as tax paying ones. Some of these companies have bagged government orders. If these were really shell companies in the real sense of the word then the government needs to be pulled up for not doing its due diligence before granting orders. But that does not seem to be the case as these companies have been rated by various rating agencies.

Many companies have immediately shot off an explanation to stock exchanges claiming that they are ‘genuine’ companies. So has Sebi resorted to cherry-picking or is there a method to the madness?

What has caused more anxiety is that SEBI has directly asked the stock exchanges to ban these companies apparently without sending a notice to the company to seek any explanation.

There may be many companies in the list that are actually shell companies, but Sebi could have done a better job in filtering out the genuine ones from the real shells. Some reports say that companies which saw unusual cash deposits have also been clubbed under the list. Without giving the companies a chance to prove their case, banning them from trading is a very harsh step not only for the company and its image but more critically, for the investors that SEBI is meant to protect.

Banning a company means that the investors are stuck with dud stocks. They would be lucky if they are able to manage an exit. It is reported that the move has caused nearly Rs 800-Rs 1,000 crore of margin funding shortfall which is adding to the anxiety in the market. Added to that are the rumours that there will be a second list with more companies on it.

This is clearly not a market environment the market regulator wants to create.

In cases where there is a genuine case of the company being a shell company, the stock exchanges and auditors need to be pulled up for not highlighting the fraud.

As for investors, the least SEBI can do to punish the companies is ask them to have a compulsory buyback of shares of the investors, that would really be investor protection in every sense of the word.