Mumbai, September 6, 2017

To crack down on shell companies, regulator may raise the bar on financial record, trading volumes

Capital market regulator SEBI is likely to propose the tightening of listing criteria on the stock exchanges, at its upcoming board meeting on September 18.

The proposal may apply to the main board of stock exchanges as well as the small and medium enterprises (SME) segment, sources close to the development told BusinessLine. The move follows the recent action by the SEBI to suspend trading in 331 entities on the ground that they were shell companies.

Listing criteria is the minimum threshold that companies should follow in terms of financial record and trading volumes to be listed on the bourses. SEBI intends to now raise the threshold to prevent shell companies from getting listed.

“The thinking within SEBI is to ensure a tighter regime against shell companies that gain entry to stock markets and become a vehicle for money laundering and tax evasion,” the sources said.

The Centre has asked all financial market regulators and investigative agencies to keep a hawk eye on shell companies as it is believed that huge amounts of black money were converted using a web of such companies during the demonetisation drive. The regulators now fear that loose listing criteria on stock exchanges have helped shell companies thrive.

SEBI had drawn flak for the overnight suspension of trading in 331 suspected shell companies as it hurt shareholders whereas promoters were the real culprits for malpractices.

Both the BSE and the NSE have minimum net worth and capital requirement for companies to list. It includes a post-issue paid-up capital of Rs.10 crore on the main board and Rs.3 crore in the SME segment. Other requirements include a minimum market capitalisation of Rs.25 crore on the main board and a profit track record for more than three years. SEBI is likely to raise the bar for all these criteria, the sources said.

Another key change that SEBI intends to propose relates to minimum trading volumes and the number of days in a year for companies listed on the exchanges to avoid suspension. SEBI will also prescribe that promoters offer a buyback option to shareholders if their companies stay suspended for a minimum number of days in a year, the sources said.

[The Hindu Business Line]