Shell-shocked after demonetisation THAT SHRINKING FEELING
The govt’s moves to bust the alleged note-ban killers are creating a new set of controversies
As critics of demonetisation get shriller after the annual report of Reserve Bank of India (RBI) revealed that 99 per cent of the banned notes were returned, the government has moved strongly to attack the vehicles that were suspected of playing a role in the failure of Prime Minister Narendra Modi’s signature black money-fighting programme: Shell companies. Though the exercise began three months ago, the attack intensified on Tuesday with the government moving to freeze the bank accounts of over 200,000 companies, which have been struck off by the Union Ministry of Corporate Affairs (MCA). It also moved to remove the directors of these companies. In a parallel move, banks have also been advised to enhance their diligence. A finance ministry directive plainly stated: “A company even having an active status on the website of the Ministry of Corporate Affairs but defaulting in filing of its due Financial Statement (s) or Annual Return (s) of Particular of Charges on its assets on the secured loan should be seen with suspicion as, prima facie, the company is not complying with its mandatory statutory obligations to file this vital information for availability to its stakeholders.” These measures come on the back of other regulators such as the Securities and Exchange Board of India (Sebi) directing enhanced surveillance and trading curbs on 331-listed companies by the stock exchanges last month. These companies had been referred to the stock market regulator by the Serious Fraud Investigation Office and the Income-Tax Department. Though a few of these suspected shell companies managed to obtain a stay from the Securities Appellate Tribunal (SAT), over 200 companies are now under Stage VI of Graded Surveillance Measures — under which trading is permitted only once a month (the first Monday) with no upward price movement and an Additional Surveillance Deposit of 200 per cent of trade value is required by the buyers. Sebi took some criticism The number of defunct/struck-off companies rose from to in 7 months for not giving the companies concerned an opportunity to be heard. Arjun Ram Meghwal, who was, till recently, minister of state for finance, explained the rationale, saying that giving such an opportunity would have taken away the surprise element. “The companies might have obtained a stay even before the order was passed,” he reasoned.
The principal problem with all this action against what the government and markets regulator deem shell companies is the lack of clear definition. Unlike the clear parameters and definition for the infamous “vanishing companies” of the late 1990s and early 2000s, no corporate law defines a shell company, the loophole that enabled SAT to strike down Sebi’s orders for some of them.
So, on what basis has the government and Sebi moved? A senior Delhi-based broker says the moves are “part of the government efforts to prove that the demonetisation move was not a failure.” As he explains, one of the key data points critics of demonetisation have highlighted is the amount of money that was returned to banks. “There are reasons to believe that a significant amount of unaccounted money was routed back into the system through these thousands of shell companies based in Kolkata, which made book entries for a fee,” he adds.
Many of these listed firms did not have genuine shareholders. “Many of these were controlled by the promoters. Even the public shareholders in some of these companies tended to be benamis [proxies] of the promoters and were controlled by them,” the broker points out.
The shareholding, benami or otherwise, of these companies is one major cause of contention now. Although about half of these companies were not traded actively, they had a significant number of public shareholders. According to a Business Standard analysis, a retail shareholder base of 2.7 million and public ownership of ~9,000 crore was hit by the Sebi move.
Virendra Jain, president, Midas Touch Investors’ Association, said a distinction has to be made between the two kinds of companies. “The ones that are private, which have been primarily floated for evading taxes and laundering unaccounted money, which could have been earned through dubious activities, including crime. This is a serious issue. Secondly, there are companies in which there are investors. These need to be handled differently.”
Jain feels that striking off shell companies itself was not a punishment. “They are putting the cart before the horse. Striking off should be the last action. Once struck off, these companies go out of the purview of the Companies Act. Instead, these errant companies and promoters should be prosecuted and sent to jail. There should be special courts to deal with these cases.”
On the listed companies too, proper procedures for violation of listing regulations should be followed so that investor rights are protected, Jain said citing provisions under the Securities Contract Regulation Act. Procedures under securities law could involve compulsory delisting and exit offers to shareholders, till which time trading would continue.”
But there are others who believe otherwise. “If I am stuck in the company, let me suffer. Why should I be allowed to pass it on to another? That way the problem is not getting solved. I am just looking for another sucker,” J N Gupta, managing director, Stakeholders’ Empowerment Services.
Clearly, the mystery of the “shell” companies and their role in defeating demonetisation is unlikely to be solved soon.
Unlike the clear parameters and definition for the infamous “vanishing companies” of the late 1990s and early 2000s, no corporate law defines a shell company. This loophole enabled SAT to strike down Sebi’s orders for some of them