Friday, December 4, 2009

Consequences of Listing Violations

One of the usual consequences that befalls a company when it violates conditions of the listing agreement is a delisting of its shares from the stock exchanges. This is perceived to be a disincentive that deters companies from breaching listing conditions. It has recently been put to use in a more mild form by the Bombay Stock Exchange that threaten to suspend 18 companies for non-compliance of the listing agreement unless they show improvement in compliance standards. Such a consequence tends to be a double-edged sword. While it hurts managers and controlling shareholders of these companies, it also curtails liquidity to small and minority shareholders whose primary exit continues to be the stock markets. Although it is not clear whether the companies involved in the BSE notice carry very many public shareholders, the suspension of trading or delisting does not address the conceptual problem of simultaneously affecting public shareholders’ interests.

The more optimal outcome would be the use of Section 23E of the Securities Contracts (Regulation) Act, 1956 that operates as a deterrence against perpetrators of non-compliance without in any way impinging on the rights of the public shareholders (who continue to enjoy the advantages of listing and stock exchange trading). Section 23E reads as follows:

If a company … fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof, it or he shall be liable to a penalty not exceeding twenty-five crore rupees.
The imposition of hefty penalties on a few errant companies, if not all, may send strong deterrence signals to the market that may likely improve overall compliance with the listing agreement.

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