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Court stays proceedings against Assamco in ‘shell companies’ case

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In a setback to the Ministry of Corporate Affairs (MCA) and market regulator SEBI, the Gauhati High Court (HC) has stayed proceedings against Assam Company (Assamco), branded a ‘shell company.’

The order could set a precedent for several other ongoing cases, legal experts following the matter told BusinessLine.

In 2017, the MCA had come up with a list of hundreds of ‘suspected shell companies,’ following which SEBI asked exchanges to take action against 331 listed companies. This included banning their stocks from being traded. While most companies appealed to the Securities and Appellate Tribunal (SAT) and got partial relief against the SEBI order, Assamco moved the High Court.

“Prima facie, branding a company like the petitioner as a shell company and thereafter initiating proceeding to prove the same virtually amounts to giving a finding first and thereafter initiating proceeding to justify the finding, like a post decisional hearing,” said Justice Ujjal Bhuyan in his recent order. “Before declaring a company to be a shell company, it was necessary on the part of MCA to have at least put the company on notice that it was being branded as a shell company but that was not done in the instant case.”

Danger of bias

“A year has passed since SEBI issued an ex-parte order branding many as shell companies but nothing has reached any conclusion and companies continue to suffer the tag,” said Sumit Agrawal, Partner, RegStreet Law Advisors, and a former SEBI official. “Such SEBI orders, which were passed based on information available then, should not continue in the name of likelihood of finding evidence in subsequent investigation or inquiries. Surprisingly, in the case of some companies, SAT had asked SEBI to dispose of the interim order ‘as expeditiously’ as possible but that too is yet to happen. A number of SEBI interim orders demonstrate a real danger of bias in securities laws where an authority may proceed with a closed mind and there is a minimal chance of getting a proper consideration to parties.”

Subhash Chandra Keyal, Assistant Solicitor General of India, who argued against the stay order, said SEBI had observed that certain short-term and long-term loans and contractual relationship with companies associated with Assamco gave rise to suspicion regarding the genuineness of the transactions and independent forensic audit had been ordered.

“SEBI’s approach in so called shell company cases is atrocious and anti-investors to say the least,” said Deepak Sanchety, a Mumbai based lawyer, and former SEBI official. “Merely on certain suspicions and without any evidence, companies with turnover of thousands of crore have been declared as shell companies. This has unduly disturbed the market equilibrium in such stocks and has caused a huge loss to investors. Surprisingly, nobody is being held accountable for this.”

Assamco had argued that in the absence of any legal definition for shell companies, its expression in only found in the popular parlance, which says that a tainted company that is used as a front for routing crime money into the economy has come to be known as a ‘shell company.’ Assamco further said it was an old and reputed company owning 14 tea estates producing 11 million kg of tea every year with a labour force of 20,000.