When companies vanish

In India, stock market investors often lose money, not because of companies failing in their business plans, but because they simply vanish from the bourses after the promoters have siphoned off funds. One should, therefore, welcome the Securities and Exchange Board of India’s (SEBI) moves to harmonise disclosure rules for listed companies and empower stock exchanges to enforce these. There are enough rules mandating regular filings by listed firms — on everything from quarterly results and shareholding patterns to price-sensitive information and details of pledged shares. Yet, these supposedly onerous disclosure requirements are freely flouted. At last count, the BSE alone had over 1,200 firms suspended from trading for not complying with listing rules; the NSE had over 150.

The reasons for poor compliance are manifold. To start with, the rules are all over the place: some are specified in the Securities Contracts Regulation Act and the Companies Act, some in SEBI circulars, and others in the listing agreement signed by each company with the stock exchange. The listing agreements, being in the nature of a contract and not a regulation, have their limitations. In addition, the exchanges themselves have been tardy in punishing defaulting firms, responding to infractions only when investors complain. Their usual response to companies not filing even basic information, such as results or shareholding patterns, has been to suspend trading in their stock. The victims of such suspensions are investors rather than the vanishing promoters — many of whom resurface a few years later with a brand new listed venture. Even the rare penalties slapped by the bourses have been too mild to deter repeat offenders.

SEBI’s latest initiative to compile all the rules into one comprehensive regulation and to empower exchanges to impose penalties could fix some of these loopholes. But the exchanges also need to take their role as first-line regulators much more seriously and play a proactive role in monitoring companies listed on their platforms. A more stringent filtering of those seeking to list is equally important; on this score, the BSE (with over 5,000 stocks) needs to do far more to do than the NSE (1,600). India is already one of the largest markets in the world. It is time we pay attention to quality rather than quantity, in strengthening equity culture. The exchanges need processes to haul up non-compliant firms within days of their missing disclosure deadlines, instead of waiting for investor complaints to pour in. Making the identity of errant companies public — perhaps those of the promoters and key managerial personnel too — via a centralised database may be an effective deterrent. Corporate disclosures are central to market integrity, and SEBI needs to do its own independent monitoring. All this would, no doubt, require both the market regulator and the exchanges to invest in additional infrastructure and staff. But this would be well worth it if it eradicates the scourge of ‘vanishing’ companies.

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