331 suspected shell cos to be probed, trading in listed firms to be restricted
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%.
INDIA VIX UP 7.4%
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.