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Cap on investment arms of corporates under study

Richa Mishra

NEW DELHI, March 12

THE Government is considering a proposal to limit the number of investment firms that can be floated by a company or a corporate group.

The Department of Company Affairs (DCA) has already set up a five-member committee to examine the prospects of plugging the loopholes that allow for corporates to float several investment firms, and facilitate control of the shareholding of the promoters.

The move to get cracking on investment firms floated by corporates is a fall-out of the March 2001 stock scam and the investigations by a Joint Parliamentary Committee (JPC).

The Securities and Exchange Board of India (SEBI), which submitted a report on the scam to the JPC, had also made out a strong case against the investment firms promoted by corporates.

The investigation by the capital markets regulator had established links between some of the corporate groups and their investment firms.

In some cases, the investment firms were used by the promoters to engage in circular trading, negotiated deals and to ramp up their stock prices.

A case in point is that of a prominent corporate house which has over 250 investment and associate companies sharing a common address.

The issue of regulating investment firms was earlier discussed by the high-level committee on capital markets headed by the Governor of the Reserve Bank of India (RBI). The onus of regulating the investment firms lies with the DCA.

DCA sources said that the five-member committee constituted by the department was also examining various aspects relating to transfer of funds among group companies as well, and whether the rules and regulations SEBI had framed for listed companies could be applied to unlisted public limited companies.

The committee comprises nominees from the Institute of Chartered Accountants of India (ICAI), SEBI and DCA. It is scheduled to meet early next week.

The DCA will be also examining whether appropriate changes can be made in the Companies Act to plug the loopholes relating to investment firms to prevent scams in the future. It was working in close co-ordination with SEBI in the ongoing investigations into the securities scam, the sources said.

"A common finding visible in the reports by the department has been that the companies under scrutiny seem to have engaged in circular trading at one time or the other,'' the sources said.

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