The Securities & Exchange Board of India (Sebi) in its second interim report to the Joint Parliamentary Committee (JPC) on the stock scam has suggested curbs on the proliferation of investment companies by corporate houses. Sebi has suggested that each company should be allowed only one investment company. It has also been made mandatory that the parent company must make yearly declarations about the investment company to the stock exchanges and quarterly disclosure about the change in investment pattern of such companies.
Sebi has suggested these measures to prevent and minimise the manipulation of stock prices through a complicated web of investment companies to circumvent various rules and regulations.
Sebi has recommended that all the listed companies must make yearly declarations to the stock exchanges about the subsidiary or associate company or partnerships set up by them for investment purposes. It has said that this deadline should also be extended to subsidiary/ associate company or a partnership set up by the subsidiary company or an associate company or a partnership floated by the main company.
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It has further suggested that if a subsidiary or an associate company or a partnership deals in 'shares or securities' , then it should be made mandatory on the part of the main company to disclose -- on a quarterly basis -- any change in investments of such subsidiary company or an associate company or a partnership.
While a company can have the right to set up any number of subsidiaries or associate companies or partnerships for manufacturing or trading, as far as investment companies are concerned, the parent company should not be allowed to have more than one investment company, Sebi has reasoned.
It has also called for a thorough checking of the antecedents of the persons behind these investment companies and has pointed out the need to keep a tab on the operations of such a company.
During the Sebi investigation, it was found that a large number of shell companies were floated by corporate houses where the directors were employees of these corporates or the nominees of their chartered accountants/ financial consultants.
These investment companies act as fronts for the corporates and large industrial houses and are used for routing funds into the stock markets.
The corporate houses give funds to these front companies for various purposes but in reality these are used for stock market operations.
At times, these funds are routed through several such companies before they reach stock markets. This way, the promoters (the corporate houses) create layers making it difficult to establish the nexus with the stock market operations.
The hidden objective and purpose of such companies are to hide the direct flow of funds from the corporates to the operator and provide cover for the identity of the corporate house behind these operators.
The investment companies thus provide a facade for the promoters of the industrial houses who carry out transactions that are not allowed or are in contravention of various rules and regulations such as the Sebi Act, the Securities Contract Regulations) Act, the Indian Companies Act etc. Generally, these companies have very low capital and most of them do not have any employees except directors, who actually are employees/ nominees of corporate houses.