Action first

Given the extent of tax evasion and money laundering or black money crossing the borders to safe havens abroad, any punitive action is welcome. Based on inputs from government agencies monitoring tax evasion and corporate wrongdoings, the Ministry of Corporate Affairs has ordered a crackdown on certain companies. The Securities and Exchange Board of India (SEBI) has directed the stock exchanges to place some 331 companies in Stage VI of the Graded Surveillance Measure under which trading is permitted only once a month - on the first Monday of every month. Since some of these companies are fairly well known, the SEBI action has taken the corporate sector as well as retail investors by surprise. 

As a reaction, the bullish mood in the stock markets has taken a hit, resulting in a sharp fall in stock prices. It is possible investors would suffer losses but investments in stocks, particularly of companies with dubious managements, are always fraught with risks. While there is a strong case for having zero tolerance towards fraudulent activities of companies and the need for a clean-up of the corporate sector cannot be over-emphasised, the MCA and the SEBI could have done the job in a more transparent and professional manner. There are no specific charges put out in the public domain against the companies concerned. Media reports suggest the SEBI has asked the stock exchanges to order an audit of these companies, which means the action has preceded an investigation. Secondly, as critics of the SEBI order point out, these companies have not been served any notices or given a chance to be heard, before or after the order was issued. 

This is not the right way to go about powerful offenders. Because of these failings the SEBI action is likely to be challenged. Litigation is damaging both for companies and their investors. While those found guilty would justifiably be delisted from the stock exchanges, those coming clean after the audit/investigation/court case would suffer financially and in terms of loss of reputation for no fault of theirs. This is not good or ethical governance. Nor perhaps the best way to bolster up market sentiment.