How the bourses and SEBI help fraudulent promoters of suspended companies

Sometime in the middle of February, Midas Touch Investors Association, headed by Viren Jain, scored a big preliminary victory when the Delhi High Court issued notices to the Securities & Exchange Board of India (SEBI) and the two national stock exchanges asking why the Central Bureau of Investigation (CBI) should
not investigate their inaction in connection with Rs58,000 crore blocked in 1,450 ‘suspended’ companies. Most of these companies are listed on the Bombay Stock Exchange (BSE); but some also on the National Stock Exchange (NSE). Companies are usually suspended for failing to paylisting fees or fulfilling compliance requirements under the listing agreement of stock exchanges. But this action only ends up punishing investors. Although a majority of suspended companies are loss-making or defunct, a few hundred are active and probably found the suspension a nice way to keep the funds raised from the public and forget their shareholders.

Viren Jain has repeatedly raised the issue of suspended companies at SEBI’s meetings with investor associations, right from December 2010. The matter was then referred to acommittee which recommended specific action against companies and their promoters/directors as well as measures to strengthen the monitoring system. At that time, 425 of these companies were still active; 60 of them were listed on the NSE. SEBI has not bothered to implement the recommendations. One recommendation was for bourses to formulate standard operating procedures to decide when a company would be suspended. Left with no other option, Midas Touch has filed a petition with the Delhi High Court asking it to direct SEBI to implement the committee’s report and to debar the directors of these companies from the capital market.

The PIL has an interesting background. The Investor Education and Protection Fund (IEPF), under the ministry of corporate affairs (MCA), which has a hefty Rs1,000 crore of unclaimed dividends in its kitty, used to support the ‘Investor Helpline’ (IH) project managed by Midas Touch. The Helpline received over 14,000 grievances, of which 2,000 were against 450 such ‘suspended’ companies. While Midas Touch was fighting a battle for investors with SEBI, the IEPF decided to stop supporting the Helpline, without an explanation. The IEPF is now packed with representatives of industry associations and professional bodies, who, ironically enough, decide how investors’ funds are to be spent. Interestingly, the managing director of NSE (who is fully aware of Midas Touch’s track record in championing investor issues dating back to the 1990s) is also a member of the committee; but even this did not seem to matter.

A suggestion by the standing committee of parliament to reconsider the decision has also been ignored. This is usually the fate of anyone who takes up cudgels on behalf of savers. Meanwhile, IEPF, SEBI and the bourses, spend vast sums of money on splashy advertisements promoting financial literacy and buying media support