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Securities Appellate Tribunal allows two alleged shell companies to trade

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Lawyers appearing for both these companies said Sebi had passed directions against them in “an arbitrary and unreasonable manner without application of mind”.

MUMBAI: The Securities Appellate Tribunal(SAT) on Thursday stayed restrictions imposed by Securities and Exchange Board of India on shares of J Kumar Infraprojects NSE 3.79 % and Prakash Industries NSE 9.62 % , which were among the 331 companies suspected to be ‘shell companies’. The Tribunal, which hears appeals against orders issued by Sebi, also criticized the capital market regulator for passing orders against the companies without investigations.

SAT has directed stock exchanges to allow trading in shares of both the companies On August 7, Sebi had directed stock exchanges to move 331 companies identified by the Ministry of Corporate Affairs(MCA) as suspected shell companies to the graded surveillance measure(GSM) list that had resulted in trading getting suspended in many of them. Both these companies moved SAT challenging the Sebi decision.

Lawyers appearing for both these companies said Sebi had passed directions against them in “an arbitrary and unreasonable manner without application of mind”.

“It is submitted that without investigating into the suspicion entertained by MCA that 331 companies could be shell companies, Sebi could not have issued the impugned communication without giving an opportunity of hearing to the appellants who are covered under the list of 331 companies.It is submitted that by no stretch of imagination Sebi could consider the appellants as suspected shell companies especially when the appellants do not satisfy any one of the 10 criteria prescribed by the Ministry of Finance for considering a company to be a shell company,” said the lawyer appearing for the companies.

The Sebi lawyer told the court that the regulator merely implemented the directions contained in the letter dated June 9,2017 from MCA and no independent investigation was carried out by it.

During the hearing, SAT said, “Sebi seems to have acted like a post o ice. Taken a letter and put it out. No material to show that companies engaged in money laundering.”

The Tribunal also said Sebi merely implemented the MCA letter without any investigation.

“Even if the letter of MCA dated June 9, was considered by Sebi to be a direction given for implementation without investigation, the very fact that Sebi took nearly two months to comply with the directions given by the MCA clearly shows that there was no urgency in issuing the impugned communication without even investigating the credentials/fundamentals of those companies, “SAT said.

The counsel for the companies said their annual turnover in last 3 years is in excess of Rs 1000 crore and have paid more than Rs 100 crore per year as income tax.

“A direction without delving into facts and circumstances and imposing restrictions, or affecting the rights of others cannot be said to be administrative or policy decision of a regulator. SEBI order on suspected Shell Companies is not a circular which is legislative or policy. This is a direction in the nature of ‘quasi-judicial’ order where there is an obligation to assume a judicial approach and to comply with the basic requirements of natural justice,” said Sumit Agrawal, Partner, Suvan Law Advisors

The Sebi counsel also informed SAT a whole time member of Sebi on Thursday heard both the companies, which have been asked to submit additional information to Sebi.