The Telegraph
Monday , June 30 , 2014
CIMA Gallary

Heat on bogus entities

Mumbai, June 29 (PTI): Capital markets watchdog Sebi plans to conduct surprise inspections of certain companies existing only on paper to bring them to book.

The Securities and Exchange Board of India (Sebi) is working on a comprehensive framework to deal with the listing and trading of only-on-paper companies and tackle this menace, a senior official said.

“The framework will also include an objective selection criterion for selecting companies for inspection, while an indicative questionnaire for surprise inspection of such companies will also be put in place,” he said.

The typical modus-operandi of such entities involves setting up of a company, followed by tall claims about their proposed business ventures. Then an exercise is undertaken to collect funds from investors, including through IPOs (initial public offers) of shares and issuance of other securities.

However, their business plans remain on paper only and they later divert funds collected from investors for personal gains or for other purposes, while leaving investors in the lurch.

In one such case, which is currently under investigation, one company raised money through an IPO for setting up a manufacturing plant in Bengal a few years ago and later announced expansion of the facility.

However, during an on-site inspection it was found the plant did not exist at the given address.

There are cases where such companies have remained listed on stock exchanges by making wrong periodic disclosures to meet the regulatory requirements, but it has been found that they did not actually indulge in the businesses listed by them.