Shell shock: No sales, years of losses, yet retail investors held up to 95% stake

NEW DELHI: Were they out of their minds when they picked those stocks?

The Sebi crackdown on suspected shell companies and fact checking thereafter reveal interesting details: almost half of these companies had nil sales and reported losses year after year, yet retail investors held up to 95 per cent stake in them!

As many as 36 lakh investors have got trapped in the stocks of the 331 suspected shell companies after a surprise Sebi crackdown led to a trading halt on these counters.

Out of these 331, 162 are listed on BSE. Data available for 154 of these firms show one-third of them, or 50 to be precise, have been reporting losses for four consecutive years now. Over two dozens of them reported zero sales for last financial year. Yet, retail and high net worth individuals hold up to 95 per cent stake in these companies.

Detailed list of firms that made losses for 4 consecutive years







Following the Sebi ban announced late Monday, the markets regulator on Wednesday asked the bourses to examine tax returns and financial details of these suspected entities for last three years.

The Union Finance Ministry on Wednesday said trading in about a dozen of these suspected ‘shell’ companies is likely to resume in a week's time. The ministry said it had taken actions against some of the companies that saw a spike in trade during the note ban. MCA has identified 331 suspected shell companies to be violating Income Tax rules, it said.

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Find the full list of the 331 shell companies here

The Sebi blacklist has eight BSE-B group companies including FCS Software, Parsvnath Developers, Zenith Birla and Nu Tek India, which have market capitalisations between Rs 6 crore and Rs 1,000 crore.

Others include Rohit Ferro, Ankit Metal Power, Impex Ferro Tech and Kaushalya Infra.

None of these eight companies have seen profits for four years till FY17. Rohit Ferro Tech reported combined losses of Rs 1,400 crore over FY14-17. The company’s sales fell from over Rs 2,500 crore in FY14 to Rs 658 crore in FY17. The stock has lost 81 per cent of market value and was trading at Rs 58.6 crore before the trading halt.

E-learning, digital content services provider FCS has seen losses of Rs 45-100 crore in last four financial years. Individuals with over Rs 2 lakh investment hold over 47.53 per cent stake in the company. The company’s losses in FY17 stood at Rs 46 crore, which far exceeded sales for the year at Rs 36.60 crore.

Lesser known Ankit Metal & Power reported a combined loss of Rs 926 crore during FY14-17. The company reported Rs 22 crore sales for FY17 against Rs 960.05 crore in FY16! Sales stood at Rs 1,461 crore in FY16. Individual investors account for one-fourth of shareholding in the company.

According to the latest yearly data available, 78 of the suspected shell companies reported losses for last financial year.

Twelve of them, including Sikozy Realtors, Bisil Plast, PALCO, Sunitee Chemicals, Crazy Infotech, Goyal Associates, have retail and HNI investors holding 80-95 per cent stake.

Among others, ATN International, G V Films, Matra Realty, Khyati Multimed and Jay Energy and Neil Industries too have high retail stakeholding.

Worst still, some of these firms reported nil sales for FY17. They include Bisil Plast, PALCO, ATN International, Matra Realty, Khyati Multimedia Entertainment Jay Energy, G R Cables, LN Industries India and G R Cables, among others.

Yet, non-promoter individual investors hold 75-92 per cent stake in these companies.

"The drastic action and bitter medicine from the markets regulator has obviously left investors with little choice right now. This episode brings to light why investors must assess the corporate governance parameters before investing in a stock. Let this be a lesson for the future as well," said Anil Rego, CEO and Founder at Right Horizons.

It is possible that many of these investors got stuck after a downcycle in the economy from 2012 through 2014 ran these companies out of steam.

The problem is that serious investors are a minority in India; most people have a trading mindset, says G Chokkalingam, Founder at Equinomics Research & Advisory.

“This mentality is visible in the cash market, where deliverables are to the tune of 10-18 per cent. You can’t do much about it. What is required is more investor awareness and steps to pursue investors to invest for the long term,” he said

Chokkalingam noted that BSE, on an average, suspends 60-70 stocks annually and most of them generally trade in the cash segment.

“The recent ban on 331 stocks is a case in point. Some may find themselves trading in companies with nil sales and with market-cap of Rs 300-500 crore. Eventually, people have to shun short-sightedness and be investors,” Chokkalingam felt.