Sebi's scanning of "shell companies" creates problems for investors, banks

Key Highlights: 

• SEBI identifies 331 suspected shell companies
• Few companies managed to have interim relief by SAT
• Sebi has begun to issue show-cause notice  

The Securities Exchange and Board of India (Sebi) is trying to identify shell companies to tackle black money in India. But it turns out that the problem of identifying a “shell company” is not as small as it looks. 

A shell company is an entity without any active business operations or significant assets. They are often created to avoid taxes and many big companies create shell corporations to avoid taxes without attracting legal actions.

Among the suspected shell companies – a list of 16 companies alone hold nearly Rs 9,000 crore market capitilisation on BSE. Moreover a total of 161 companies have over 2.7 million public shareholders. 

It all started on August 07, 2017 when Sebi directed BSE, National Stock Exchange (NSE) and Metropolitan Stock Exchange to identify listed companies out of the list of 331 suspected shell companies received by the Ministry of Corporate Affairs vide letter dated June 09, 2017. 

Out of these identified shell companies, 162 were active trading firms on BSE; while 48 were on the NSE and remaining  have already been suspended by the respective stock exchanges on account of irregularities.

Since then, markets have been panicking so much so that Sensex and Nifty reached to a one-month low last week. Although global cues like rising tensions between North Korea and the US are also partly to blame. 

Vibhor Singhal and Shyamal Dhruve, analysts at Phillip Capital said, "The suspension of trading comes as a shocker to the investors, with no anticipation of the  same. We also do not recall the last time, when trading was simultaneously suspended in so many companies (162 in total) of such significant size together."

Government sources were quoted in media reports as saying, "Sebi may probe role of big brokerage cartels involved in the banned companies trading. These big brokerage cartels must have provided platform for money laundering." 

Government feels these big brokerage cartels must have aided suspected shell companies in cash dealings during the demonetisation drive. Also they must have routed funds to show Private Equity (PE) investment in shell companies. 

The market watchdog has asked BSE and NSE to verify credentials and fundamentals of these companies, also to seek auditor certificate from companies. It has asked to place these companies in Stage VI of Graded Surveillance Measures (GSM) with immediate effect.

Further, Sebi also started issuing a show-cause notice to 331 listed entities, suspected to have acted as shell companies for those with illicit funds, while action has also begun against more than 100 unlisted entities that could have traded in stocks with laundered money, top regulatory, reported PTI. 

However, many companies like Prakash Industries, J. Kumar Infraprojects Limited, Parsvnath Developers Limited, Gallantt Ispat Limited, Gallantt Metal Limited, Inter Globe Finance and SQS India BFSI Limited have denied the allegation imposed by Sebi. 

These companies have knocked the door of Securities Appellate Tribunal (SAT) and managed to obtain a stay on the trading restrictions by way of an interim relief. 

On February 10, 2017, according to Ministry of Finance, there were about 15 lakh registered companies in India with only 6 lakh companies filing their annual income tax returns. 

The ministry carried an initial analysis to identify shell companies by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset.

Analysis revealed that Rs 1,238 crore cash was deposited in these entities during demonetisation period of November-December. 
Serious Frauds Investigations Office (SFIO) has filed criminal prosecution for cheating national exchequer after investigation entry operators running a group of 49 shell companies and other proprietorship concerns. 

It was found that 559 beneficiaries have laundered money to the extent of Rs 3,900 crore with the help of 54 professionals. These information has been shared with SIT, Income Tax Department, Enforcement Directorate, SEBI and The Institute of Chartered Accountants of India (ICAI). 

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