The ultimatum

The Securities and Exchange Board of India is right in cracking the whip on promoters of companies that were previously listed on the now shut regional stock exchanges. In a circular issued this week, the regulator has asked these companies to either list on national stock exchanges or buy back the shares from investors; non-compliance will result in stringent action. Since 2012, SEBI is engaged in winding down the regional exchanges without harming the interests of investors whose money is locked in shares listed on these exchanges. It had provided various exit options to companies including allowing them to list on national stock exchanges with diluted listing norms, seeking voluntary de-listing or listing on disseminating boards set up on national stock exchanges. But despite these measures, investors in the thousands of stocks that are listed on regional stock exchanges have been struggling to find suitable sellers. Companies have been reluctant to de-list as this entails cash outflow and dissemination boards have been a failure with scarcely any trading on these platforms; largely due to lack of investor awareness.

Through the recent circular, SEBI has made it easier for companies to raise funds through preferential allotment route so that they can meet the listing requirement of larger national exchanges. Investors will find it easy to find a buyer if these companies start trading on the main platforms of the exchanges. Companies that do not seek listing are required to get their company valued by an independent valuer and make an open offer to their shareholders, which is adequately publicised through media and exchange websites. The promoters making the open offer have to open an escrow account and deposit the amount required to make the open offer in the account. The most important part of the new rules is the penal action prescribed for errant promoters who do not adopt either of these exit routes. The company, its directors, promoters and other group companies will be barred from stock markets for 10 years, shares of promoters and directors are to be frozen, their names are to be widely disseminated and their assets can also be attached to pay back investors.

These rules show that SEBI is serious about coming down hard on deviant promoters. The tricky part here will, however, be the valuation of the companies. It needs to be ensured that companies do not dress their accounts to show large losses in order to lower the share value. SEBI has also not specified the date at which the company will be valued; this creates some leeway to tamper with valuation. Factoring in the average revenue and earnings of at least the last three years to arrive at the valuation, will be a good way to circumvent this issue. Also, SEBI has made the designated exchanges responsible for overseeing the exits of these companies. Given their past track record, it is best that the regulator too keeps track of the implementation of these exits.

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