Shell Companies: SAT grants relief to 2 companies against SEBI order

The Securities Appellate Tribunal (SAT) has today, stayed the SEBI order on suspected shell companies, that had put 331 entities under the Stage VI of the Graded Surveillance Measure (GSM). However, the stay order is only limited to the two companies that have appealed..Under stage VI of GSM framework, trading in these identified securities shall be permitted only once a month under trade-to-trade category. Further, any upward price movement in these securities shall not be permitted beyond the last traded price and additional surveillance deposit of 200 percent of trade value shall be collected form the buyers, which shall be retained with exchanges for a period for five months..The SEBI had earlier this week, on 7 August directed three stock exchanges to take action against 331 listed companies based on a list provided by the Ministry of Corporate Affairs (MCA). This is a list of “shell companies”, a term, which has not been statutorily defined in India..However, many of these listed companies aren’t just penny stocks and include perfectly well-known healthy firms as well – firms such as J Kumar Infraprojects Ltd and Prakash Industries Ltd , which moved the SAT against the SEBI order..It was argued on behalf of the companies that the decision was arbitrary and unreasonable inasmuch as no opportunity was provided to the companies to be heard before the decision was made. Further, it was submitted on behalf of the companies that,.“…by by no stretch of imagination SEBI could consider the appellants as suspected shell companies especially when the appellants do not satisfy any one of the 10 criteria prescribed by the Ministry of Finance for considering a company to be a shell company.”.It was argued on behalf of SEBI that, firstly any administrative action taken by SEBI is not appealable to the SAT in light of Supreme Court’s order of March 7, 2017 in the case of NSDL, and secondly that the SEBI hasn’t concluded these companies as shell and has only referred to them ‘suspected’ shell companies..SAT rejected SEBI’s claim with respect to the order being an administrative one. SAT ruled,.“…the impugned communication which prejudicially impairs the rights and obligations of the appellants, its promoters and directors would fall in the category of a quasi judicial order and hence appealable before this Tribunal under Section 15T of SEBI Act.”.SAT, in its order, also stated that while MCA’s letter to SEBI required SEBI to conduct its own investigation and take appropriate actions thereafter if necessary, the SEBI has failed to do so and taken action basis a two month old letter written by MCA..In the end, SAT ruled,.“….we are prima facie of the opinion, that the impugned communication issued by SEBI on the basis that the appellants are ‘suspected shell companies’ deserves to be stayed.”.Senior Counsel Janak Dwarkadas appeared for J Kumar and Senior Counsel Pradeep Sancheti appeared on behalf of Prakash Industries. Senior Counsel Darius Khambata appeared for SEBI..[Read order]