Finally, the last date came and Sebi, true to its word, issued a penal order on the promoters and directors of 105 companies for non-compliance with the minimum public shareholding guideline. The rule of law prevailed, especially in an area which has witnessed disheartening laxity in the past.

There were about 200 non-compliant companies as of June last year. Surprisingly, only less than half of these companies complied. Another example of blatant defiance of law and governance! Of course, the list of 108 also includes as many as 33 suspended companies, who are already seriously non-compliant with the listing agreement, many of them for several years, leading to their suspension.

As per Sebi?s order, till such time these companies comply, the voting rights and corporate benefits like dividends, rights issues, bonus shares, split, etc, of the promoters of such companies have been frozen; two, the promoters and directors of these companies have been barred from dealing in the securities of their respective companies; and three, the promoters and directors of these companies have been barred from holding any new directorships in any listed company.

Though these may appear as harsh measures, and corporate India is already describing them in such a manner, in reality all these actions are soft, with none of these harming the promoters significantly. Corporate benefits, for example, have been frozen. As such, as far as dividends are concerned, if these have already not been paid out for the last financial year, it would only mean that the pay-out would be deferred at best. Bonus, rights or splits are not routine activities and happen only very rarely, and in case some companies indeed were planning any of these, the same could easily be deferred.

Promoters and directors also rarely sell or buy their own securities on a regular basis, and even if there is a need, this too can be deferred or pledged. Also, new directorships are not a routine occurrence and, if need be, can easily be deferred. So, the defaulting companies, in fact, can heave a sigh of relief at literally getting away.

It is good to see that all actions taken have been targeted towards the promoters/directors, and not against the companies, recognising that it is these persons who are responsible for non-compliance, and punishing the companies actually hurts the minority shareholders.

The redeeming feature of Sebi?s order is the indication of the harder actions that may follow including levying monetary penalties, initiating criminal proceedings, moving the scrip to trade-to-trade segment and excluding the scrip from the F&O segment. Rightly, delisting or suspension has not been used or suggested, as that would have badly hurt the minority shareholders.

A three-month deadline should now be set after which some or all the above proposed penal actions should be taken. Specifically, the quantum of monetary penalties, which should be very stiff (maybe 15% of the value of the extra shares), should be announced forthwith to work as a deterrent.

Dividends should not just be frozen but be annexed and either be equally distributed to the minority shareholders or be credited to the Investor Protection Fund of Sebi.

Moreover, as suggested by this author earlier, on the expiry of the deadline, the frozen shares of the promoters should be auctioned by Sebi, subject to provisions of law, in the open market through the stock exchange mechanism, with no floor price but with a cap on each bid. Alternatively, these shares could be offered only to the retail at a 15% discount. For illiquid stocks, closed bids should be invited with no floor price but with a cap on each bid. If shares are not fully sold, repeat auctions should be undertaken. The proceeds from such sales/auction can then be transferred by Sebi to the promoters after deducting share sale expenses.

Another route that Sebi should consider is to allow companies to offload the shares to their genuine permanent employees ? with a cap on allotment to each employee.

Interesting to watch would be the timing and methodology of the PSUs which need to comply with these guidelines by August. The last PSU dilution took place in March. Typically, action may come only very close to the deadline date, and one could also see other routes being used. It would, of course, be desirable if the PSU stocks are sold only to the retail investors through an FPO with a 10-15% discount (and a lock-in of, say, two or three months may be imposed). We will otherwise again miss out on yet another opportunity of increasing our retail base.

Going forward, it is equally important to investigate the genuineness of the shareholders shown as public shareholders. It is commonly believed that in many companies shares are held by many such individuals and organisations who are actually the fronts of the promoters. It would be appropriate to recall that investigations by Sebi a few years ago had led to a shocking revelation that several ADR/GDR holders of many companies were, in fact, closely associated with the promoters, and hence Sebi had to take the extreme step of stipulating that ADR/GDR shareholding in all companies shall not be treated as public shareholding.

Concluding, this issue is a good example of the laxity at which compliance is taken in India. The companies had several years (since 2006) to become compliant and subsequently were also offered several alternative routes for dilution. In fact, for the first-time ever, Sebi also opened its doors for a one-on-one discussions with companies to find solutions. Promoters were, of course, hoping for yet another extension and tried all kinds of excuses, especially given the fact that, last time around, an extension had been given. Time to demonstrate more actions against non-compliance is ripe.

The author is the chairman and managing director of PRIME Database