Why are SME, LTCG orders being revoked?

Regulator could throw more light on the reasons behind these recent U-turns The matter, which came to be referred to as the SME scam, soon caught the attention of Sebi, the regulator, and by June 2015, an order restraining some 239 entities was passed

In late 2014, the buzz about certain SME (small and medium enterprises) stocks without any fundamentals skyrocketing began to do the rounds in the media.

Unknown names, which had listed their companies to raise a few lakhs on the SME platform, had suddenly become billionaires as the stock prices shot up in a short span.

The matter, which came to be referred to as the SME scam, soon caught the attention of the Securities and Exchange Board of India (Sebi), the regulator, and by June 2015, an order restraining some 239 entities was passed. Subsequently, a further 16 entities were added to this list.

Sebi had said these were involved in the dizzying rise in the share prices of four companies: Eco Friendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment (CNE), and HPC Biosciences.

The regulator said it found funds raised through initial public offers by these companies were routed back by a closed group of trading members to push up the prices, and these, along with pre-IPO allottees and promoters, controlled significant equity shares in the companies.

“I note that currently a major portion of the shareholding (around 35.43 per cent in Eco, 41.10 per cent in Esteem, 41.01 per cent in CNE, and 56.22 per cent in HPC) is lying with the preferential allottees, pre-IPO transferees, Funding Group, Trading Group and the promoters/directors of these companies,” then Sebi wholetime member Rajeev Kumar Agarwal had said in his order.

After more than two years of investigation, 216 entities were let off by a revocation order passed by Sebi Member S Raman, on September 6, the last day of his term. On the same day, another order revoking strictures on 91 entities connected to First Financial Services was passed by Raman.

First Financial, listed on the main board, was part of another scandal, the longterm capital gains (LTCG) abuse, which the regulator started pursuing around the same time as the SME issue.

“The preferential allottees acting in concert with First Financial group have misused the stock exchange system to generate fictitious LTCG to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax-exempt,” Sebi had found.

Sebi was of the view that the schemes, apart from being a possible case of money laundering or tax evasion, “is prima facie, also a fraud in the securities market in as much as it involves manipulative transactions in securities and misuse of the securities market”.

In two weeks since, two more orders have been passed by Member Madhabi Puri Buch, revoking orders against 244 and 114 entities (in two other cases).

Thus, in 15 days, Sebi has let go 665 of the 833 entities it had originally restrained in these four cases. Investors would be better off had the Sebi orders been more explanatory.

Each of these four revocation orders broadly said that following investigations, prima facie findings were not observed in respect of these entities. This is surprising because in one case at least, the regulator had issued confirmatory orders as late as July.

Our justice system is based on the principle that 100 culprits could go free but not a single innocent should be wrongly convicted. These hundreds of entities were kept out of the market for two years. What remedy can the regulator offer them now if indeed they did no wrong?

Inability to close such cases, which caught the public’s attention, casts a shadow on the credibility of such ad-interim, ex parte orders passed by the regulator. Strong penal action against the 100-odd entities left in the group could be some redemption.