Background

In 2008, the Securities and Exchange Board of India (SEBI) started de-recognition of regional stock exchanges. The companies which were exclusively listed on these de-recognized stock exchanges (the Exclusively Listed Company or ELCs) were transferred to the Dissemination Board (DB) hosted by nationwide exchanges (NSE and BSE) and were given two options: (i) to list on nationwide stock exchanges; or, (ii) to provide an exit to the shareholders.

Since then SEBI has issued a number of circulars/notifications specifying and streamlining the process for ELCs. SEBI has also eased the listing norms and simplified the process of raising further capital with a view to expedite the process of listing. Further, ELCs who either did not meet the eligibility criteria to list on nationwide stock exchanges or were not keen on listing on nationwide exchanges were asked to submit a ‘plan of action’ for providing an exit to its shareholders in a manner detailed in the SEBI circular dated October 10, 2016 (Exit Circular).

Current Status

The ELCs listed on the DBs were provided time till June 30, 2017, by which they were required to choose and implement either of the two options available to them. On July 7, 2017, SEBI issued a press release whereby it provided the data on the status of ELCs in India.

DESCRIPTION No. of ELCs
ELCs on Dissemination Board as on October 10, 2016 2253
ELCs which have obtained listing on the Main Board of the Exchanges 189
Companies exited or removed from Dissemination Board 64
Companies on the Dissemination Board as on June 30, 2017 2000
Companies which have submitted the plan of action 376
Companies which are not traceable 1088
Companies which are traceable and not submitted plan of action 536

For these 1088 non-traceable companies, SEBI has initiated a process whereby they will be included in the list of “vanishing” companies, as maintained by the Ministry of Corporate Affairs. The directors and promoters of such vanishing companies are debarred from accessing the securities market by SEBI, apart from other actions taken by the Registrar of Companies.

For the other 536 ELCs who have not submitted a plan of action, SEBI has issued a circular on August 1, 2017, whereby it has taken following actions against the promoters and directors of such ELCs:

  • Restriction on transfer of the equity shares, held by the promoters and directors of ELCs, by way of sale, pledge, etc.;
  • Corporate benefits, such as, right to dividend, bonus shares, split, etc. on the equity shares held by the promoters and directors of ELCs are frozen;
  • ELCs, its directors, its promoters or any other companies which are promoted by either of these entities have been barred from accessing the securities market and from raising fresh capital;
  • The promoters and directors of the ELCs cannot continue with or become a director in any other listed company.

Our Analysis

SEBI circular penalizing promoters and directors of ELCs who have not submitted a plan of action has far reaching consequences, especially in light of the manner in which these restrictions are imposed on defaulting ELCs. It is interesting to note that these restrictions are imposed by way of a circular issued under Section 11(1) of the SEBI Act, 1992 which is more of an administrative tool in the hand of SEBI to regulate the affairs of the market and is typically used to issue rules and regulations to be followed by market participants. Section 11(1) does not provide SEBI with quasi-judicial powers to impose penal actions against set of market participants, as has been done in the instant case.

It would be only prudent for SEBI to issue a reasoned order under Section 11B and 11(4) of the SEBI Act, as it had done in other cases like that of LTCG (Long Term Capital Gains) and MPS (Minimum Public Shareholding). Imposition of such harsh penalties on directors/promoters of ELCs in the form of a circular will set a dangerous precedent.