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Shell companies tag: Three firms move SAT against Sebi order

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JKumar Infraprojects, Prakash Industries, Parsvnath Developers have filed with SAT petitions against Sebi order naming them suspected shell companies

Mumbai: Three companies—J Kumar Infraprojects Ltd, Prakash Industries Ltd and Parsvnath Developers Ltd—on Wednesday approached the Securities Appellate Tribunal (SAT) against their inclusion in a list of 331 suspected shell firms against which the market regulator sought action by stock exchanges.

SAT heard the pleas filed by J Kumar and Prakash Industries, but the petition filed by Parsvnath Developers did not come up for hearing. SAT will continue hearing the matter on Thursday. 

SAT, in its initial observations, said Sebi should offer a clarification on the provisions used to direct stock exchanges to act against the 331 companies and hear out those making representations to the regulator. According to Sebi’s Monday night directive, shares of these companies will be traded only once a month until stock exchanges ascertain whether they are genuine entities or structures meant for fund diversion and tax evasion.

The three companies that approached SAT are among the biggest of the 331, only 162 of which were actively traded; the rest had already been suspended.

J Kumar Infraprojects had a market capitalization of ₹ 2,146 crore, Parsvnath Developers ₹ ,020.5 crore and Prakash Industries ₹ ,119.86 crore. 

During Wednesday’s hearing, Janak Dwarkadas, arguing for J Kumar, said Sebi’s direction was arbitrary and unreasonable. Senior advocate Pradeep Sancheti appeared on behalf of Prakash Industries. 

The companies argued that Sebi, the ministry of corporate affairs (MCA) and the exchanges had not verified whether they are shell companies or not and the principle of natural justice had not been followed. They added that it is not clear what provisions of the Sebi Act had been used to pass the directive.

Sebi’s communication to stock exchanges said its directive was based on a 9 June letter from the MCA identifying these 331 firms. It was not clear how the MCA shortlisted these firms; the list of firms mentioned that the income tax department, serious fraud investigation office and early warning systems played a role. Sebi’s counsel argued that it was a first of its kind order against suspected shell companies. 

“Regulatory action, in the absence of an inquiry, notice and hearing is certainly going to face a challenge as being…presumptive and against the principles of natural justice. Though every company in the Sebi list has been painted with the same brush, on the face of it, there are companies who are generating profits and financial reporting about them is available publicly, they are paying taxes and many of them are publicly servicing government contracts. It is not clear what is a ‘shell company’ and what constitutes ‘credentials/fundamentals of a company’? While the object behind Sebi’s such order is honourable, process is questionable,” Sumit Agrawal, partner, Suvan Law Advisors, who so far doesn’t represent any company on the list, told Mint.

Yogesh Chande, partner at the law firm Shardul Amarchand Mangaldas, cited a Supreme Court judgement of 7 March, which said Sebi circulars cannot be challenged in SAT because they are part of its administrative function.

“After the judgement of the Hon’ble Supreme Court in the matter of NSDL (National Securities Depository Ltd) it is a settled position that Sebi administrative circulars cannot be challenged. Having said that, Sebi has currently not concluded that these are shell companies and has only referred to them as ‘suspected’ shell companies,” he said. “These companies are still available for trading but under heightened surveillance. Surveillance of any nature is the right available to a stock exchange under its bye laws and regulations, and such a right cannot necessarily be seen as affecting the companies themselves whose securities are listed on stock exchanges.”