Sebi crackdown on 331 'shell' firms: Why are regulators scared to question auditors?

For the past couple of days there have been long queues at SEBI Bhavan, headquarters of the market regulator at Bandra-Kurla Complex in Mumbai. It's the representatives of the 331 companies that were banned from regular trading on stock exchanges by the Securities and Exchange Board of India (SEBI). Sebi has directed the bourses to initiate action against them as they are suspected to be "shell" companies -which is neither defined under the Companies Act nor in any of the SEBI regulations. Most of the companies have queued up to plead their case with the market regulator explaining that they aren't dubious or shell companies. They want to get their name removed from the SEBI list as they can also face compulsory delisting.

While SEBI has asked exchanges to examine tax returns and financials of the 331 companies, it is not clear whether a show cause or appropriate notice was given to these companies. It's also strange that an autonomous body like SEBI hastily gave directives to the exchanges after the corporate affairs ministry shared the list of suspected shell entities.

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But the larger question is: Why is the regulator not questioning the auditors and rating agencies in this country? In the case of these 331, rating agencies may not come into the picture but the role of auditors is certainly to be questioned given that SEBI doesn't believe the audited reports of these companies that have to be compulsory filed every year. All the 331 listed companies are registered and have appointed statutory auditors and their accounts are signed by statutory accountants. If the regulatory authority is sure of the misdoing in these companies why have they not filed a case against the auditors and why has no FIR being filed till date?

Then, all filings are available online and SEBI has the power to check the same but it chose a path of not checking the data and instead asked the companies to prove their innocence. This also puts a question mark over the course of action initiated by SEBI : Why didn't it check the available data till now?

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Time and again SEBI talks about investor protection as its priority but its move to impose trading ban on 331 companies overnight has been the biggest disservice to the investors who are now trapped. These companies have also seen many institutional and high profile investors like Rakesh Jhunjhunwala. The SEBI action is questionable as they could have just banned promoters and company from buying and selling securities and freeze promoters holding instead of suspending the scrips from regular trading to trading once a month.

This isn't the first time that the regulators are being soft on auditors. Satyam Computers and NSEL fiascos are still fresh in people's mind. The market regulator needs to answer some basic questions on the need for hygiene checks before issuing diktats to ban scrips from trading in 331 companies. Also, why did an autonomous body like SEBI come under government pressure? Is this an effort to curb the black money menace or are there some other factors at play here? The government had all the powers to conduct raids through income tax department or enforcement directorate for tracing black money. Why did it chose the SEBI route to punish these 331 companies. The government and regulators know that the trading ban can be challenged at tribunals and higher courts and be revoked.

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The hasty decision by SEBI can do irreparable damage to the reputation of these companies also bring a bad name to the Indian markets, driving away global investors.

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