Where listed companies have failed to comply with the requirements under the listing agreement, stock exchanges usually resort to suspension of trading in shares of the offending company, as an enforcement mechanism. While this might seem an effective enforcement mechanism, the collateral damage caused to investors is unacceptably large, as it deprives them of the only exit route available. This grievance was finally addressed by SEBI, in its Circular dated 30 September, 2013, when it utilised its power to amend bye-laws of stock exchanges and incorporated a fine-based structure, including prescribing a standard operating procedure in the event of non-compliance. These are welcome additions to the enforcement mechanism as they introduce consistency and uniformity of approach amongst the stock exchanges.
There are two major benefits. First, there is a shift to a multi layered enforcement mechanism along with differential treatment of repeat offenders. The first layer will be imposition of fine for every day of noncompliance. Although the fine is a relatively small amount (thousand rupees a day for most offences), non-submission of shareholding patterns or financial results for more than 15 days attract a higher penalty of either 0.1 % of the paid-up capital of the entity or Rs. 1 crore, whichever is less. Continued non-compliance would result in restricting the trading of shares only to non-promoters and only on “trade for trade” basis. Further non-compliance would result in suspension.
These amendments to the listing agreement merely restrict liquidity in scrips of non-compliant companies as opposed to complete suspension of the trading of the shares. This would allow genuine investor interests to be protected due to non-compliance by the management of the listed entities. Further, since promoters of such non-compliant entities are restricted to participate in the trade for trade window, it would assist in the freezing of promoter shareholding during the period of non-compliance.