Vanishing Companies: Why Won’t SEBI Use Tech and Forensics To Track Them Down?
On 26th May, the Bombay Stock Exchange (BSE) published an advertisement announcing plans to delist 50 companies from the Exchange (see list below). These are companies that have failed to comply with various regulations and have been suspended for over six months. The Exchange sends a couple of show-cause notices to the ‘last known’ address of the companies and delists them when there is no response. 
 
Over 700 companies have been similarly delisted in the past. This should be of deep concern for their investors; but they usually wake up long after it is too late for any action. While it is the Exchange that delists companies, the problem lies at the door of the Securities and Exchange Board of India (SEBI) which has failed to ensure justice to investors of such companies. 
 
The current BSE management, stuck with the unfair legacy of being the first-line regulator for thousands of small companies with low equity capital, is keen on getting rid of the regulatory burden and cost. Shares of such companies, even when actively traded, are susceptible to organised manipulation and the Exchange is usually held responsible. BSE sources, correctly, point out that the Exchange has no power to do anything other than delist them. Meanwhile, National Stock Exchange (NSE), by far the dominant exchange for two decades, has no such legacy issues or responsibilities because it cherry-picked stocks right at inception. 
 
Price manipulation in very low-priced stocks is also used for tax evasion. Moneylife did a cover story on this in 2017 titled “Black to White”. In the post-pandemic period, it is a tool to lure lakhs of gullible new entrants into the market into casino like traders. A simple Google search will lead you to helpful screeners listing stock quoting below one rupee. Websites of major news channels and Quora, Telegram and WhatsApp are fertile grounds for such stocks. They fear no action from the regulator, even though it is clear who can, or cannot, recommend investment products. 
 
But shouldn’t investors expect that a formal regulator and the listing process would involve greater scrutiny and action? Once the companies are delisted, investors will be stuck with worthless shares in their demat accounts and continue to pay annual charges to the depository participant (DP) to keep them there. There is no process to write them off and doing so also ends any chance to benefit, if the company chooses to re-list in the future. Remember the DLF Ltd saga of over a decade ago? Investors, who hung on to their shares post-delisting, made massive gains when the company came back with a large public offering and re-listed, when realty market boomed again. 
 
It is SEBI’s job to ensure a fair deal for investors. But, typical of India, this battle is being doggedly fought by one person—Virendra Jain of Midas Touch Investors Association. In the 1990s, it was his effort that led to SEBI and the ministry of corporate affairs (MCA) recognising the concept of ‘vanishing companies’ – meaning companies that raised public money in cahoots with investment bankers, banks and brokers and vanished with the loot. 
 
He had filed a public interest litigation (PIL) in the Allahabad High Court and won a favourable order, way back on 26 March 1999 [writ petition 659 (MB) of 1998] outlining the path to be followed to bring such companies to book. A Court-ordered coordination and monitoring committee (CMC) was set up, but had done nothing effectual to trace the money.
 
How would Mr Jain’s effort help investors? Equity is risk capital and businesses can do well or fail. But a well-regulated capital market ensures that promoters do not dump investors effortlessly by simply avoiding compliance. At the very least, the business has to be liquidated and the proceeds shared among all investors based on their holdings. The returns may be meagre; but it would deter rampant cheating. 
 
The Allahabad High Court order laid down a process for identifying companies that ‘mis-utilised’ money raised from the public and ‘disappeared’. As per the Court order, a first information report (FIR) needs to be filed against the promoters and directors followed by action to recover and restore assets to shareholders, if necessary, through liquidation. 
 
To my mind, the primary responsibility for action is that of SEBI, rather than MCA, because the issue is about listed entities. SEBI should spend money collected from fines and penalties imposed on intermediaries for investigation and legal action to ensure a fair deal for investors. On 6th June, Midas Touch Investors’ Association served a notice to SEBI, MCA and chairmen of CMC that had been set up in 1999. Since he intends to follow up with a contempt petition, he may want to seek a modification to the 1999 order, making it entirely SEBI’s responsibility to trace the owners and act against them. 
 
In 1999, SEBI did not have the power of search, seizure and arrest that it has today. The regulator no longer needs police help for tracing promoters or initiating action. The Court, based on the situation then, had asked MCA to initiate suo moto action against these companies, while also asking both regulators to initiate action under their respective statutes. Clearly, they are uninterested. 
 
Mr Jain did a random check and found that at least 10 of the 50 companies had filed annual reports until 2016-2017. This means they had a place of business that some auditors registered with the ICAI (Institute of Chartered Accountants of India) knows about. There were returns uploaded on MCA’s website. 
 
In the 22 years since the Allahabad High Court order, we have made rapid strides in technology with stringent identification and reporting rules by MCA, to the extent that directors need to upload photographs in front of their offices. It is no longer acceptable for a government regulator to claim that companies and their directors and not traceable ‘at their last known address’, when private lenders are able to use technology, not only to track down those who have borrowed as little as Rs500 but also harass their friends and relatives to shame them into paying their debt, sometimes driving the borrower to suicide. 
 
Why should well-funded and all-powerful regulator like SEBI not be able to go after promoters and auditors? And why should investors, who have lost money because of weak regulation, be satisfied with ineffectual action such as barring promoters and their directors for a couple of years, without an effort to disgorge ‘mis-utilised’ funds and refunding them to investors. 
 
Having outlined the process to recover money, the Allahabad High Court had said, “We are satisfied that the action taken and the principle enunciated therein would certainly be a step towards identifying the defaulting companies and protecting the interest of the investors regarding claim of their money.” The Court expected regulators to ensure penal action against promoters. 
 
Some 22 years later, it is clear that this order has not worked and needs to be updated with the times to go after the 50 companies sought to be delisted now. The solution is simple. SEBI needs to get expert help (technology and forensics) to identify the promoter/directors and initiate quick action. It can be done in a few weeks if the regulator is serious. 
 
Unless SEBI is forced to do its job, it is a simple matter for dodgy promoters to raise money when the going is good and ensure that their shares are delisted by simply not bothering with compliances. Surely, this is not how capital market regulation is supposed to work? Do never-ending red tape and disclosure rules apply only to companies that want to remain listed, while the rest do what they please?
 
Retail investors need to be proactive too. For a start, they can look at the list of 50 below and help Mr Jain gather more information on the companies using technology and tracking tools. This will help strengthen his case for regulatory action (write to him at [email protected]). Those who have invested in these companies also need to check their demat accounts and come forward to demand action. Only when investors demand action will regulators be forced to act. 
 
 

Comments
lcrossroad
3 months ago
In the recent case of Videocon industry SEBI could have asked NCLT for buyback of videocon industry shares in due course so that the shares r not remains with the investors in their demat account...
Also so many companies have delisted earlier as well...
Kamal Garg
3 months ago
Delisting of shares, in no way, helps the investors in any way. First, there is a perpetual entry in the holding statement of the depositories, which can't be deleted and every year, you have to yearly maintenance charges to the DP. Secondly, you cannot claim 'loss' in your income tax return also, because, technically, the shares are still in your demat account and not 'sold/transferred' .
So this whole process is a big fraud. Imagine, shareholders of Gitanjali Gems (of Mehul Choksi fame), holding shares with zero value, also not able to claim 'loss' in income tax return also.
Rubbing salt on the wound/deep wound.
Shri999
3 months ago
????????????
vaibhavdhoka
4 months ago
SEBI should find solution for delisted shares and ease shareholders apathy for unnecessary paying depository charges.
vaibhavdhoka
4 months ago
SEBI should find solution for delisted shares and ease shareholders apathy for unnecessary paying depository charges.
lcrossroad
4 months ago
very good article ..But problem is no ministry/govt is interested in protecting retail investors interest whether its sebi/mca/rbi.. all are always eager to help defaulters.
Recent case of videocon industry where bankers took 95% cut on there own whose money is this public did MCA/SEBI helped in the case NO.
As you are aware money life has taken great initiative in Feb 2016 towards Fixed deposit holders of various companies , but till today there is no update on the same.
No information is available with MCA site ( some time not even guiding )or any other site where we can get the latest update/status of the same.
Request if you can update on the same as well.
industryconsult36
4 months ago
industryconsult36 I can not read the names.
shridhar.chippa
4 months ago
Thank you Mam. It was good video and information. I have looped money life and Virendra Jain Sir to help me.
ravindracse.gnec
4 months ago
Mam thanks for your updated information
ravindracse.gnec
4 months ago
Mam thanks for your updated information
suketu
4 months ago
thank you moneylife for enlightening on such imp issues no one covers.congrats and keep it up.
rpshiv1966
4 months ago
I also held shares of teledata info in 2007 but after a gimmick of demerger the company was suspended and delisted
nemajp
4 months ago
SENIOR is worth less and is doing nothing for small investors. I have a big investment in Teledata companies. SEBI valuer has given the value as rs 33 per share but no one including NSE, BSE exchanges and has done anything. I wrote to pramoter with no success. If SEBI is engaging valuer for delisted companies than it must ensure that fair value is paid to share holders and if value is zero than then share must be deleted from DEMATE account also.
nemajp
Replied to nemajp comment 4 months ago
SEBI not Senior
essbee331
4 months ago
It needs the government to have a will to see that investors are not cheated. So much hard earned money of the innocent investors has been looted by these fly by night companies and still it is being. The promoters after looting lead a comfortable life with public money. Why the government of the day is not acting only God knows. On the contrary IT department asks for a list of such unlisted companies also from the assesees.
pkkumarji9
4 months ago
I have lost my money in 2 delisted companies. Vishal exports Overseas Ltd and Omnitech infosolutions. It has been almost 10 yrs now.
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