Around 270 firms face delisting heat as SEBI, exchanges move against inactive companies vulnerable to pump-and-dump

These include market capitalisation of less than Rs 10 crore, profitability over the years, Net worth,  shareholding and significant movements in share prices over a short period. The parameters are currently under discussion and are aimed at identifying companies that remain listed despite having limited or no meaningful business operations. Once a preliminary list is prepared based on the parameters, exchanges are expected to conduct physical verification of the companies.

This would include visits to their registered offices and business locations to establish whether they have genuine business operations or exist largely on paper, sources said. Companies that cannot be traced at their registered addresses and meet the other identification parameters could be issued notices by the exchanges, asking them to explain why they should continue to remain listed. If such companies fail to provide satisfactory explanations or establish the existence of genuine business operations, they could face delisting proceedings under the Securities Contracts (Regulation) Rules (SCRR).

According to one source familiar with the discussions, around 250 companies listed on one stock exchange and approximately 20 companies on another could come under the scanner and potentially face delisting. Concerns over pump-and-dump schemes, misuse There are several concerns surrounding inactive listed companies, with the potential misuse of their shares for market manipulation being one of the primary issues, sources said.

Such companies can become vehicles for pump-and-dump schemes, in which operators artificially drive up share prices through misleading information and trading activity before selling their holdings at inflated valuations, leaving retail investors with losses. Another concern is the possible use of these companies as vehicles for reverse mergers. Entities that may otherwise not meet the eligibility requirements for a conventional stock market listing could potentially use an already-listed inactive company to gain access to the listed space through a merger.

Tax-related misuse is another area of concern. In the past, shares of certain companies with little or no business activity have allegedly been used for transactions aimed at generating artificial long-term capital gains or booking losses to reduce tax liabilities. The proposed exercise is aimed at identifying such entities and ensuring that companies without genuine business operations do not continue to enjoy the benefits of a stock market listing while potentially exposing investors to risks.

SEBI chairman Tuhin Kanta Pandey recently said the regulator was working on a proposal to address the issue of inactive listed companies. He indicated that allowing companies with little or no meaningful business activity to remain listed could go against the interests of public shareholders. What do the regulations say? The Securities Contracts (Regulation) Rules, 1957, provide stock exchanges with powers to delist securities under specified circumstances.

Rule 21 of the SCRR allows a recognised stock exchange to delist a company's securities on several grounds. These include the company incurring losses for three consecutive years and having a negative net worth, trading in its securities remaining suspended for more than six months, or its shares being infrequently traded over the preceding three years. Other grounds include the addresses of the company, its promoters or directors being unknown, or the company having furnished false addresses.

A company can also face delisting if its public shareholding falls below the prescribed minimum level and it fails to restore it within the period specified by the exchange. Importantly, the rules provide that a company cannot be delisted without being given a reasonable opportunity of being heard. In cases of compulsory delisting under the specified provisions, the company, its promoters and directors are jointly and severally liable to purchase the outstanding shares from investors who wish to sell, at a fair price determined under SEBI regulations.

But, usually its applicable in cases where the company has fair market value, determined as per delisting regulations. The proposed delisting could have a marginally negative impact on exchanges as it would reduce their listing fee income. However, it would also ease their surveillance burden by reducing the number of inactive companies they need to monitor.