Sebi ban on shell companies: Why investors should be worried

The ban will be harsh on companies that eventually come clean post Sebi investigation, feel analysts

If you hold shares in any of the suspected shell companies that have been banned from trade following the Sebi order on Monday, you have a genuine reason to worry – at least for now.

On Monday, market regulator Sebi directed the stock exchanges to ban trading in shares of 331 suspected shell companies and placed them under a graded surveillance measure (GSM) stage VI, where trading in the security is allowed only once a month with “surveillance deposit” of three times the trade value.

According to estimates, mutual funds and investors collectively own shares worth nearly Rs 9,000 crore in these entities based on their last trading price, with at least five companies commanding a market capitalisation (market-cap) of Rs 500 crore each. Some of the prominent ones among those banned include J Kumar Infraprojects, Parsvnath Developers, Prakash Industries, SQS India BFSI, Gallantt Ispat, Adhunik Industries and Assam Company.

So what should investors do? Remain patient for lack of better options is what most experts are advising. “For companies that are found to be clean and genuine, there will be a rectification and there is no need to panic. For the others, investors have no recourse. Even if they are permitted to trade once a month, there will be no buyers for such stocks. It is advisable to take a hit or write off losses,” advises G Chokkalingam, founder and managing director of Equinomics Research & Advisory. 

However, others such as Ambreesh Baliga, an independent market expert, says it may not be easy as there is limited room for cutting short the losses. “There may be sellers on the single day of trading and it could trigger circuit limits. So, not all investors can expect a recourse. Therefore do not rush to be sellers before a final verdict. Nonetheless, Sebi’s move is a black mark for the listed stocks, and even if normal trading resumes, it will be tough for these companies to regain investor confidence,” he adds. 

Another long-time market expert also advises on similar lines. “Now, the only option they have is to remain patient with these stocks. There is no point in selling these shares even on the single day of trade. They might as well wait to see if normal trading resumes or Sebi delists them. For now, that is the only remedy they have,” he points out. 

But if some of the investors get an opportunity to exit, it would make sense to book losses in the unknown scrips with little track record.

On the whole, experts welcome the move to ban shell companies. They feel the order will prove to be particularly harsh on companies that eventually receive a clean chit after investigation.

“Sebi’s order has taken investors by surprise and led to erosion of serious wealth. If some of the companies are found not to be shell companies, this order will still destroy their valuation,” says Rajesh Narain Gupta, managing partner, SNG & Partners, a law firm.

A shell company is often referred to as an investment vehicle for various financial manoeuvres or one kept dormant for other purposes. Investors, therefore, need to analyse the promoter holding, assets held by the company, its revenue channels, dividend track record and so on to decide if the firm is a shell company or not, experts suggest.

Gupta believes the devil lies in the detail for these companies. “It is not clear whether notice was given to these companies. Some of them appear to be good names. Protection of consumer interest is paramount, however, a balance needs to be explored between protection and logical interference,” he adds.

Therefore until the final verdict is out, those holding shares in the banned companies are left with little choice for now.