331 sus­pected shell cos to be probed, trad­ing in listed firms to be re­stricted

The Economic Times - - Front Page - Our Bureau

Mum­bai: Stocks fell on Tues­day af­ter the reg­u­la­tor an­nounced that in­ves­ti­ga­tions will be launched against 331 sus­pected shell com­pa­nies and that trad­ing will be se­verely re­stricted in those that are listed, forc­ing the Nifty be­low the 10,000 mark for the first time in about two weeks. The bench­mark Sen­sex closed 0.80% lower at 32,014 points while the Nifty ended 0.78% down at 9,978, cap­ping a sec­ond day of de­clines. The last time the Nifty fell be­low the 10,000 mark was on July 27. The BSE mid and small cap indices fell 1.20% and 1.27%, re­spec­tively, over the last two trad­ing days. The Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) said late on Mon­day that the min­istry of cor­po­rate af­fairs had iden­ti­fied the com­pa­nies and asked bourses to en­sure that the listed ones be “placed in Stage VI of the Graded Sur­veil­lance Mea­sures with im­me­di­ate ef­fect”. This means the stock can only be traded once a month and any in­crease in value will be capped. Sebi also told ex­changes to ver­ify cre­den­tials and con­duct foren­sic au­dits if needed. Any en­tity found to be a shell com­pany will be delisted, the reg­u­la­tor said.

Many of those on the list plan to move the Se­cu­ri­ties Ap­pel­late Tri­bunal against the de­ci­sions, lawyers said. Fund man­agers said the reg­u­la­tor may have found rea­son to sus­pect some en­ti­ties of money laun­der­ing af­ter last year’s de­mon­eti­sa­tion.

An­a­lysts said the order may not go un­chal­lenged by some com­pa­nies es­pe­cially due to the lack of a def­i­ni­tion for the word ‘shell’ in the Com­pa­nies Act. Some of the en­ti­ties said that they were bona fide com­pa­nies that op­er­ate gen­uine busi­nesses and will seek to have the curbs lifted.

“While it is an ex­cel­lent order over­all, there are seven-eight com­pa­nies where there is some un­cer­tainty re­gard­ing it and they may” file ap­peals, said SP Tul­sian, founder, Pre­mium In­vest­ments. He said there could be a loan trail from some of the listed com­pa­nies to other shell en­ti­ties, which may have prompted the reg­u­la­tor to take ac­tion. The Sebi step ap­peared to do lit­tle to dent ac­tiv­ity. Trad­ing vol­umes in the cash seg­ment on both ex­changes rose 26% to ₹ 35,653 crore from the pre­vi­ous day.

Par­tic­i­pants said the greater im­pact of the Sebi move was on sen­ti­ment rather than the mar­ket. In­vestors and traders used the event as an op­por­tu­nity to cut some of their more bullish bets as the mar­ket searches for the next ma­jor trig­ger. With first-quar­ter results fail­ing to in­spire in­vestors and the Re­serve Bank of In­dia sig­nalling limited in­ter­est rate cuts in the near fu­ture, such events may test the strength of the mar­ket, al­ready on edge amid wor­ries about val­u­a­tions be­ing ex­ces­sive. The Nifty has risen 21.9% so far this year, breach­ing 10,000 on the way, while the Sen­sex has risen 20.2%.


Some of the ner­vous­ness was ap­par­ent in the move­ment of the volatil­ity in­dex. The In­dia VIX was up 7.4% at 12.7 Tues­day. It has risen in the past two days from 11.4 at the end of last week.

“Moves like these give op­por­tu­ni­ties to clear the ex­cess froth in the mar­ket,” said Dharmesh Me­hta, manag­ing di­rec­tor, Axis Cap­i­tal. “The money is now likely to flow into good-qual­ity com­pa­nies rather than op­er­a­tor-driven ones.”

The Nifty trades at a rel­a­tively ex­pen­sive price-to-earn­ings ra­tio of 19.6 times earn­ings for the cur­rent fi­nan­cial year com­pared with the MSCI Emerg­ing Mar­ket in­dex which trades at 13.4 times.

Shares of com­pa­nies in sec­tors such as realty, en­ergy, power, bank­ing and fast-mov­ing con­sumer goods (FMCG) fell 1.2-4.4%.

Lawyers ad­vis­ing some of the en­ti­ties on the Sebi list said prin­ci­ples of nat­u­ral jus­tice had not been fol­lowed and the cri­te­ria by which they were cho­sen for the graded sur­veil­lance mech­a­nism wasn’t clear.

“The in­ten­tion of Sebi is rightly placed though the process and the man­ner in which such an order has been passed without hear­ing the par­ties is legally un­ten­able,” said Su­mit Agrawal, founder, Su­van Law Ad­vi­sors.

Me­hta of Axis Cap­i­tal said: “My sense is that Sebi won’t take such a de­ci­sion un­less there is in­crim­i­nat­ing ev­i­dence for the same.”

Some an­a­lysts warned that the sell­off could in­di­cate a change in in­vestor per­cep­tion of a mar­ket trad­ing at record lev­els. “This could be a sign that they are get­ting scared of the over­all mar­ket mo­men­tum, be­cause oth­er­wise such in­ci­dents were be­ing ig­nored,” said Dhanan­jay Sinha, head, in­sti­tu­tional re­search, Emkay Global Fi­nan­cial Ser­vices. “Peo­ple are get­ting rid of the fa­tigue by sell­ing off across the board.” The Nifty PSU Bank In­dex fell 2.39% on Tues­day. Shares of State Bank of In­dia, ITC, ONGC, NTPC and Axis Bank fell as much as 2%. Both for­eign and do­mes­tic in­vestors used the dip in the mar­ket to buy shares on Tues­day af­ter sell­ing eq­uity to the tune of ₹ 500 crore on Mon­day. For­eign port­fo­lio in­vestors bought shares worth ₹ 1,539 crore while do­mes­tic in­sti­tu­tional in­vestors bought shares worth ₹ 798 crore on Tues­day as per pro­vi­sional data.

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