BSE’s move to introduce new norms for revocation of suspended companies starting next month has been challenged in the Delhi High Court. A public interest litigation (PIL) has been filed in the court seeking a stay on implementing the proposed rules has alleged that these could potentially result in losses to public shareholders of these suspended firms.
The proposed rules require the 1,400-odd suspended companies to maintain stringent new norms of minimum paid-up capital or net worth requirement and convert shares into demat form among others to revoke their suspension.
Suspended companies unable to meet the new revocation criteria may possibly face delisting once these are implemented, resulting in virtually no exit option for shareholders stuck in these companies.
“The proposed norms are against the interest of investors and rather serve the interests of promoters of these suspended companies. We have requested the court to stay the new provisions otherwise there will not be any possibility of revival of the suspended companies,” said Ajay Veer Singh, partner of New Delhi based law firm BS Jain & Co, who has filed the PIL on behalf of his client Atul Agarwal.
The Delhi High Court has given three weeks for BSE, Sebi and others to respond. The next hearing is listed for May 16, 2012. Email questionnaires sent to BSE and Sebi did not elicit any response.
Market participants said that the new norms, which are scheduled to be effective from May 15, are stringent for most of the suspended companies to comply with. For instance, the requirement to shore up the minimum capital requirement will be the tough for some companies which were listed earlier with smaller capital base.
“It is difficult for a company to raise funds to increase the capital base when it is suspended. New norms say that the entire issued capital must be listed,” said PR Ramesh, senior consultant, Economic Laws Practice.
Experts added some suspended companies may also struggle to meet the other criteria, required to revoke their suspension, such as minimum number of shareholders, profit-making requirement and compulsory dematerialization of shares.
“The new norms further stipulate a profit-making track record but there is no quantification for the same. Similarly, how can any company compel its public shareholders to demat the shares?
Many suspended companies are unable to meet the demat criterion of positive net worth of 1 crore and, hence, are rejected by the depositories for demat. In such a case, it is difficult to manage 50% public holding in the demat mode,” said Ramesh.
Last year, BSE said the new norms will be applicable from July, 2011 but they were deferred after protest from investors. The PIL is aimed at protecting the interest of over one crore public shareholders, who have almost 1.8 lakh crore stuck in these suspended companies, said Singh.
Before finalising such norms, the regulators should make all efforts to recover investments made by the shareholders by conducting thorough investigation in the affairs of the company, said Pavan Kumar Vijay, MD, Corporate Professionals. “If the company is delisted like this, retail investors will be the biggest losers. Regulators should penalize promoters and directors in case of a willful default,” he said
A large number of companies suspended for not fulfilling listing requirements are regularly filing their financial results with Registrar of Companies (RoC), said people familiar with the matter.