New Delhi/Chennai, Aug 10

The Securities Appellate Tribunal (SAT) on Thursday stayed the trade restriction order by securities market regulator Securities and Exchange Board of India (Sebi) on building construction services provider J.Kumar Infraprojects and steel and power firm Prakash Industries.

The development comes a day after J.Kumar Infraprojects and Prakash Industries approached SAT against Sebi, which had classified them as "shell companies".

SAT in its order pronounced: "As rightly contended by counsel for appellants, letter addressed by MCA (Ministry Of Corporate Affairs) ... merely required Sebi to investigate as to whether the 331 companies named therein which were suspected to be shell companies, were in fact shell companies and whether the said companies had any credentials, fundamentals and, if so, Sebi was required to take action in accordance with Sebi Act and the regulations framed thereunder."
The SAT order stated that without conducting any investigation in respect of 331 companies which as per the letter of MCA dated June 9, 2017 were suspected to be shell companies, Sebi on August 7, 2017 sought to take action by directing stock exchanges to suspend the trading in the securities of all those companies on daily basis.

"Thus, it is apparent that Sebi passed the impugned order without any investigation. Even if the letter of MCA dated 09.06.2017 was considered by Sebi to be a direction given for implementation without investigation, the very fact that Sebi took nearly two months to comply with the directions given by the MCA clearly shows that there was no urgency in issuing the impugned communication without even investigating the credentials, fundamentals of those companies," the order read.

"In the facts of these two appeals, we are prima facie of the opinion, that the impugned communication issued by Sebi on the basis that the appellants are 'suspected shell companies' deserves to be stayed."
On late Monday, the stock market regulator had imposed trade restrictions on all 331 firms on suspicion of being "shell companies".

The aforesaid securities were placed in suspended animation from Tuesday, as exchanges stated that the trade in these stocks shall be permitted only once a month.

The market regulator directed major indices -- National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange of India -- through a letter sent late on Monday evening to initiate action against stocks of these suspected firms.

The Sebi letter forwarded a list of the 331 suspected "shell companies" identified by the MCA.

According to the letter, trade in all the 331 listed securities shall be placed in "Stage VI of the Graded Surveillance Measure (GSM)" with immediate effect.

"If any listed company out of the said list is already identified under any stage of GSM, it shall also be moved to GSM stage VI directly," the letter said.

The stage VI of GSM framework mandates the exchange to allow trade in the identified securities only once a month under its trade-to-trade category.

The framework further mandates that any upward price movement in these securities shall not be permitted beyond the last traded price amongst additional surveillance measures.

The letter further read: "Exchanges shall initiate a process of verifying the credentials, fundamentals of such companies."
"Exchanges shall appoint an independent auditor to conduct audit of such listed companies and, if necessary, even conduct forensic audit of these companies to verify its credentials, fundamentals."
Besides, the letter stated that shares held by the promoters and directors in "such listed companies" shall be allowed to be transferred by depositories only upon verification by the exchanges concerned and they shall not be allowed to transact in the security except to buy securities in the said listed company until verification of credential, fundamental by exchanges is completed.

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