At least three firms — J Kumar Infraprojects, Parasvnath Developers and Prakash Industries have approached the Securities Appellate Tribunal (SAT) against the circular of the Securities and Exchange Board of India (Sebi) classifying them as “suspected shell companies”.

This after Sebi directed the stock exchanges to initiate action against 331 listed companies which are suspected to be shell firms. These scrips will not be available for trading this month, and could even face compulsory delisting. The regulator’s directive came after the corporate affairs ministry shared a list of 331 listed companies that are suspected to be shell entities.

In its petition, J Kumar Infraprojects had requested that the Sebi direction on trading ban should have stayed with immediate effect. The company had submitted that Sebi’s trading ban on its shares is arbitrary and unreasonable.

During the hearing of the petition on Wednesday, the appellate tribunal said that it needs to know under what law or regulation Sebi has taken action against the firms. It said that Sebi should have followed natural justice before taking action against the 331 companies. SAT also said the capital markets regulator should hear the suspect shell companies’ representations and then pass orders.

Sebi has informed the tribunal that its action is not final. Sebi said that it has taken only a first time action against the suspected shell companies after the Ministry of Corporate Affairs shortlisted the firms. The regulator said that it has not concluded that all the companies are shell companies. SAT will continue to hear the case on August 10. Meanwhile, Sebi’s circular on suspected shell companies has generated mixed reactions amongst experts.

SEBI and Kwality Ltd, India news, National news, Business news, India Business news“I don’t see this as an order but a preventive measure by Sebi. Such measures are taken when the regulator feels that small investors could be at risk. Sometimes preventive measures can impact those who are not guilty as well but then there is ample provision in the law for such firms to take legal recourse. This measure will have a temporary negative effect on the stock markets but will help weed out companies which do not have genuine business operations,” said JN Gupta, co-founder and managing director of proxy advisory firm Stakeholder Empowerment Services (SES) .

Rajesh Narain Gupta, managing partner at SNG & Partners said Sebi’s order has taken industry and investors by surprise and has negatively affected the reputation of some firms that may not be shell companies.

“This has lead to erosion of serious wealth and if some of the companies are found to be not shell companies this order shall still be a death knell on their perception and valuation. Devil lies in details so we need to take a deep dive on this order. It is not clear whether show cause or appropriate notice was given to these companies to justify whether these are actually shell companies or not. Some of the names appear to be good names. Protection of consumer interest is paramount, however, balance needs to be explored between protection and logical interference,” said Rajesh Narain Gupta.