Upholding the securities law is SEBI’s dharma. So one is forced to wonder why the capital market regulator had to ban trading in 331 ‘suspected’ shell companies on suspected tax evasion. Black income and tax evasion, the key attributes of a shell company, are the subject matter of the income tax department. It is not clear why SEBI had to intervene in this matter.

Investors are aghast that SEBI banned trading in these stocks based on suspicion of breach of a law that has nothing to do with stock market trading rules or the Securities Act. Any investor can drag the regulator to court seeking damages caused due to its lax judgement.

Share market investors can factor in ‘price risk’ due to poor performance, fraud or potential liability to a company for tax evasion. But never has anyone calculated the ‘risk’ of an overnight ban on stock trading in the case of a ‘suspected’ shell company. Even in the case of Satyam Computers which had all the elements of a massive tax fraud, stock trading was never suspended. Its share price crashed from around ₹500 to a measly ₹8 but investors were never denied an exit at any point.

SEBI may have been on the wrong foot as is evident from the partial reversal of its decision by the appellate authority. ‘Exit opportunity’ at any given point of time for a stock market investor is his right. No regulator should take it away, especially if it does not violate any securities law. Prosecute the company management for its crimes but never the investors. Promise of an exit lures them to markets, but exchanges are busy de-listing companies. The need of the hour is to tighten pre-listing rules.

Senior Assistant Editor

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