In a massive clean-up effort, the stock market regulator, Securities and Exchange Board of India (SEBI), is mulling the delisting of companies that have remained suspended and not traded for seven or more years due to various penal reasons.
Stock exchanges suspend the trading of shares of a company in the event of any non-compliance with the listing conditions. More than 4,000 suspended companies are under the SEBI lens and could be delisted. This includes over 1,200 companies on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), besides over 3,000 companies on the various regional stock exchanges that have become defunct. The process of compulsory delisting can be initiated by a stock exchange if a company has been suspended for a period of over six months, or its shares have remained infrequently traded during the preceding three years. "Therefore, while the press release after the SEBI board meeting in March this year only dealt with 'encouraging delisting of suspended companies', the regulator and the stock exchanges are well within their rights to seek delisting of companies that have been suspended or not traded for over seven years," says Yogesh Singh, Partner, Trilegal. The move is aimed at safeguarding the interest of investors. "The shareholders of these companies do not get the benefit of a liquid market that the stock exchanges offer. The benefit to these shareholders from this proposed move by SEBI and the stock exchanges is that it provides them with an exit should they so choose," adds Singh. The regulator has to ensure that listed stocks are actively traded, point out experts. "We boast of having the largest universe of listed stocks, but it means little in the absence of meaningful trading," says Alok C. Churiwala, Vice Chairman of BSE Broker Forum, who agrees that it's time to bite the bullet. There are two sets of suspended companies - some of which are operational and not trading but don't want to delist, and others that are defunct. "The regulator should explore all the possibilities before closing all the doors," says C. J. George, Managing Director, Geojit BNP Paribas Financial Services.
The action, however, has already begun and the BSE is considering compulsory delisting for suspended companies in a phased manner. In the first phase, letters have been sent to 509 companies advising them to initiate the process of revocation of suspension. "Follow-up letters have also been sent out in this regard. So far, 52 companies have sought revocation of suspension in trading of shares and one company has sought delisting, in response to this communication. The exchange has subsequently issued a showcause notice to the companies, which have not responded to the earlier letters, informing them about the provisions of SEBI Regulations 2009 (delisting regulations), and what the process of compulsory delisting would entail," says a BSE spokesperson.
A scan of BSE-listed companies based on the data from ACE Equity throws up interesting insights. There were 1,021 companies that have remained suspended for a period of seven years or more as on June 1, 2016. Of these, over 900 companies have remained suspended for more than a decade and a little over 1 per cent has remained inactive for more than two decades. And just threedozen companies have remained suspended for less than a decade. A majority of these companies - around 86 per cent - is penny stocks that have traded below Rs 10 and more than half of the companies have traded below their face values. Most of these companies have weak balance sheets - more than onethird of the lot is loss-making and 67 of them have 'zero' revenues.
Independent valuers have been empanelled by the BSE to compute the fair value of companies that are to be delisted. "Various valuation parameters are taken into account for the determination of the value at which the promoter is required to acquire the shares from the public shareholders. These include the book value, comparable trading multiples and other customary valuation parameters. This is clearly the toughest part and given the implications of compulsory delisting, we would expect the promoters to litigate, to delay, if not avoid the consequences of such a step," says Singh of Trilegal.
The delisting process may not impact the exchanges in a very significant way, but there could be some short-term impact in terms of the listing fees if they (exchanges) have been receiving it, says Churiwala.
Singh of Trilegal believes that for companies that do not respond to the stock exchange communications, or where promoters cannot be traced, the entire process is likely to be fairly long drawn out. However, if a promoter fails to purchase the shares held by the public shareholders, it could lead to stern action by the exchanges and the regulator. It could include imposition of a Rs 25 crore penalty by the regulator - failure to pay up could mean imprisonment of up to 10 years for promoters.
All said and done, it will be a daunting task for SEBI and the exchanges to clean the decade old mess.