Sebi action on shell companies: Long road to exit for 2.7 million investors

Market players say stringent trading rules in Grade-VI GSM could discourage buyers

Shareholders who want to exit from the 331 “shell” companies in which trading has been restricted may have to wait for months because surveillance rules related to them are rigorous. Of the 331 companies, 161 companies — with a retail shareholder base of 2.7 million and public ownership of Rs 9,000 crore — were actively traded until Monday. As punitive action, the stock exchanges, on the direction of the Securities and Exchange Board of India (Sebi), has put these companies in Grade VI of the Graded Surveillance Measure (GSM), where trading is allowed only on the first Monday of every month.

Also, the buyers have to stump up three times the value of the trade as ‘additional surveillance deposit (ASD)’, which is locked in for three months. More importantly, upward movement is permitted in these stocks and circuit filters of that particular stock are applicable on the lower side. For instance, JKumar Infraprojects, currently on the shell company list, has a circuit filter of 20 per cent and its shares closed at Rs 283.7 on Monday.

IN DEEP FREEZE: The wait could be excruciatingly long for lakhs of investors in companies that have been put in Grade VI.

Buyers will have to bid for JKumar shares in the range between Rs 227 (lower circuit) and Rs 283.7 (Monday’s close). Also, an investor who wants to buy shares worth Rs 10,000 will have to provide an ASD of Rs 30,000. “The wait could be over a year if investors want to sell shares in some of these companies. There will be only sellers because the image of the companies has become bad. No buyer would want to pay a 200 per cent margin and buy shares of these companies. However, there are 10-12 genuine companies that have got added to the list. Hopefully, relaxation will be given to them soon,” said SP Tulsian, founder, Premium Investments. Given the negative sentiment created around these suspect shell companies, market players say there may not be buyers even at the lower circuit on September 4, when the trading window opens.

Trading was active in 161 of 331 barred companies. These 161 companies have 2.7 mn retail shareholders.

The matter could become tricky for companies in which there is mutual fund (MF) holding or foreign portfolio investment (FPI). MFs have an investment in a handful of the 331 companies, such as JKumar Infra and SQS India. The schemes with an exposure to these stocks will face difficulties in computing their net asset value (NAV). Also, holding shares in some of these companies could go against the principles laid down by funds. Such institutional investors will look to exit these stocks at whatever prices, say market experts. “Sebi has taken harsh action, due to which investors are now trapped. Although the grounds for taking such decision are reasonable, the regulator should have at least given some notice to the companies and investors, or could have shifted these companies to the trade-to-trade category,” said Siddharth Shah, director, JGA Shah Share Brokers. Market players say Grade VI is the most-stringent among the six different categories of the GSM. Grade V is similar to VI, however, it allows price movements in both the directions. Experts say the stringent norms are to ensure that these companies are not used to launder black money through the stock market.