Ban on ‘shell companies’ may trigger margin funding crisis

PALAK SHAH Mumbai | Updated on January 09, 2018


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SEBI action spooks market; margin shortfall estimatedat ₹800-1,000 crore

A margin funding crisis may be looming in the stock market after regulator SEBI on Tuesday banned 331 suspected ‘shell companies’ from trading.

The Securities and Exchange Board of India asked exchanges to discontinue daily trading in the companies identified by the Ministry of Corporate Affairs as ‘shell’ entities, or those mainly used to launder money.

Stock brokers said there was an estimated margin shortfall of around ₹800-1,000 crore from clients due to trading suspension in companies, including J Kumar Infraprojects, Prakash Industries, Pincon Spirit, SQS India BFSI and Parsvnath Developers.

A few traders on Dalal Street, who held these shares in their portfolio, had placed them as margin to leverage their positions. Similarly, retail and high net-worth players too had placed them as margin.

Traders are allowed leveraged positions to the tune of 40-60 per cent of the shares deposited as margin with brokers. The free-float data in respect of these five companies — at more than ₹3,000 crore — suggests that traders could have availed of at least ₹800-1,000 crore in funding by placing them as margin.

Air of uncertainty

But SEBI’s overnight ban order effectively wiped out the margins built on these shares. It forced brokers to square off the leveraged positions of clients who refused to make good the margin shortfall.

“The SEBI order made these companies illiquid, and hence their margin value fell to zero,” said Rajesh Baheti, MD, Crosseas Capital. “The worry is (that) there will be scrutiny of even other companies, the shares of which are kept with brokers as margin. What is the guarantee that there won’t be another list out in the future classifying even more companies as shell?”

Brokers accepted these shares as margin due to their popularity with marquee investors. Billionaire investor Rakesh Jhunjhunwala and mutual funds and foreign investors, including HDFC, Blackrock, UTI, Axis Bank, BNP Paribas and ITF Mauritius were among the top shareholders in some of the companies banned by SEBI. This ‘halo effect’ rendered the shares of these companies attractive to retail and HNI traders.

Brokers criticised SEBI for failing to give any reason for classifying these companies as ‘shell’ entities. Some of them have profitable businesses and pay taxes. A source close to the regulator said the government had detected a surge in cash deposits in these companies following demonetisation or they had links to politicians. However, J Kumar, Prakash Industries and a few other companies denied they were ‘shell’ companies.

The Sensex and the Nifty fell nearly 1 per cent on Tuesday, despite net buying by foreign portfolio investors and domestic institutions to the tune of around ₹1,539 crore and ₹798 crore respectively.

Published on August 08, 2017

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