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SEBI's order on shell companies

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August 15, 2017

What is the issue?

The recent order of SEBI to suspend the trading of suspected shell companies is alleged to be a baseless decision without any proper investigation.

What is the case?

  • A shell company serves as a medium for business transactions without itself having any significant assets or operations.
  • They are also used for tax evasion or tax avoidance.
  • The Ministry of Corporate Affairs shared a list of 331 listed companies that are suspected to be shell entities.
  • This was after consultations with the Serious Fraud Investigation Office and the Income Tax department.
  • It directed SEBI to investigate the companies and take necessary action against them under the SEBI Act.
  • SEBI, subsequently, ordered to suspend trading in 331 suspected shell companies’ shares.
  • It also placed them on a strict watch under its Graded Surveillance Measure (GSM) framework.
  • Following this, the Securities Appellate Tribunal (SAT) has ordered the lifting of the trading restrictions imposed on two of the 331 companies.
  • SAT has also questioned SEBI for passing an order “without any investigation”.

What was SEBI's rationale?

  • It is suspected that trading on the shares of these “shell” companies was used as a way to launder black money.
  • Since demonetisation the Centre has deregistered well over 1,60,000 dormant companies, identified over 37,000 shell firms and over 3,00,000 firms engaged in suspicious dealings.
  • The decision comes as a measure to ensure a sound business environment.

What is the impact?

  • The government’s resolve to act against dodgy companies is valid.
  • However, the present move has failed to give  suspect companies an adequate chance to explain their positions.
  • Not all shell companies are illegal. Some were formed to raise funds to promote start-ups.
  • The economic costs of freezing the trading are disproportionate with the proposed benefits of such action as stocks witnessed a sharp fall after the order.
  • A hasty order without an independent investigation has dealt a serious blow to SEBI's credibility.
  • Though, the SAT order has brought some fairness to the entire proceedings, SEBI and the government must give a convincing rationale behind their actions.

Quick Facts

SEBI

  • The Securities and Exchange Board of India (SEBI) is responsible for protecting the interests of investors in securities, to promote and to regulate the securities market.

SAT

  • Securities Appellate Tribunal (SAT) is a statutory body established under the provisions of Securities and Exchange Board of India Act, 1992.
  • It is a three-member tribunal to hear and dispose appeals against orders passed by the Securities and Exchange Board of India.
  • A second appeal lies directly to the Supreme Court.

Graded Surveillance Measure (GSM)

  • SEBI and stock exchanges had introduced the graded surveillance measure framework which came into force from March, 2017.
  • This is to monitor securities which have witnessed abnormal price rise not commensurate with their financial health and other fundamentals.
  • SEBI may lay additional restrictions on market participants dealing in identified securities subject to the satisfaction of certain criteria.
  •  At present, there are six stages defined under GSM framework. Surveillance action has been defined for each stage.

 

 

Source: The Hindu

1 comments
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harsha 7 years

How is  the shell companies working in trade sir ? 

Whether shell companies trade their securities and change the black money into white money they have .

But how investors invest in a unknown shell company which they dont know? 

Pls help me out about it

Dinesh 7 years

A shell company acts like it performs some service, while in reality it has no operations or assets. Money launderers deposit the money with these companies and become its shareholders. Now the black money from the money launderers will be used to be shown as profit by creating fake invoices and receipts to account for the money inflow. So effectively the unaccounted money from the launderers returns to them as legitimate money. As the company seems to perform well, it becomes attractive to investors. They invest because it looks legitimate in every sense other than the real operations. As long as it is attractive and legitimate, investors will invest.

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