Black money in stock markets: Sebi to suspend shell companies

By: | Updated: February 8, 2015 4:56 PM

Cracking its whip on entities using stock markets for evading taxes and laundering black money...

Sebi, Sebi news, Sebi market, market news, Sebi Black money, sebi case, sebi Fraud case, sebi companiesSebi found a typical pattern in trading of shares of these companies. First, the shares would be allotted on preferential basis to certain connected entities, price would be pushed higher without any fundamental move. (Reuters)

Cracking its whip on entities using stock markets for evading taxes and laundering black money, watchdog Sebi has decided to suspend trading in listed companies that are found to be used by such manipulators.

The capital markets regulator has identified three parameters for taking action against such companies and the trading would be suspended in the shares of those entities that satisfies more than one of the criteria.

“These parameters include these companies being non- existent on their mentioned address, misuse of preferential allotment and weak fundamentals not supporting price rise,” a senior official said.

In its probe into various such cases, Sebi found huge share price rally in shares of the companies that existed only on paper and did not even exist on the addresses mentioned in their regulatory filings, while preferential allotment has emerged as a major route for laundering of illicit funds.

The modus operandi typically involves stock market dealings aimed at evading capital gains tax and showing the source of income as legitimate from stock markets.

Sebi found a typical pattern in trading of shares of these companies. First, the shares would be allotted on preferential basis to certain connected entities, price would be pushed higher without any fundamental move, followed by an exit being given to these investors and the shares would be sold back to the company or related entities raking in huge profits.

Such huge profits were made in stocks where fundamentals or financials of the companies did not justify the price.

A large number of small NBFCs and brokers are already under Sebi’s scanner for having facilitated illicit transactions worth thousands of crores of rupees over the past 2-3 years, sources said.

It has emerged during investigations by Sebi and stock exchanges that such illicit activities tend to accelerate during last few months of a fiscal and quantum of such transactions has grown manifold in the last few years.

Besides, a number of such entities, which includes both individuals and corporate brokerage firms, have been found to be repeat offenders for various offences in the securities market and many of them create new shell companies to hide their past precedents.

Those under the scanner also include some listed firms and their promoters, who regularly offer their services for channelising black money and for evading taxes through use of stock exchange platforms.

While it may be difficult to quantify the entire value of black money laundered through stock markets, as also the total tax amounts evaded through this platform, sources said that the total figure may easily run into several thousands of crores of rupees given the spread of such illicit activities.

In just two cases, where Sebi last week passed interim orders, total illicit gains estimated worth Rs 500 crore have come to the fore in case of a select few entities.

Besides, being possible cases of money laundering or tax evasion, Sebi has found such activities to be securities market frauds as well, as they involve manipulative transactions in securities and misuse of the market.

While Sebi is further probing these cases, it has also referred the matter to the Income Tax Department, Enforcement Directorate, Financial Intelligence Unit, among other agencies, for necessary actions on their part.

These cases have come to the fore at a time when the government has sharpened its focus on unearthing black money stashed abroad and within the country, while Sebi also recently tightened its surveillance of shell companies created solely for the purpose of tax evasion or money laundering activities.

Detailed investigations are underway to find out the role of other entities, connection amongst the concerned entities and the ultimate owners of funds used for manipulating the price of the scrips.

Sebi is also looking into the role of various listed companies, mostly small and mid-cap entities, which are suspected to be existing ‘only on paper’ and initiated action against more than 25 such firms amid concerns they could have been set up to route black money or evade taxes.

During its inspections, which began pursuant to ‘alerts’ generated by Sebi’s surveillance department, the regulator found that some of these companies were not even physically present at their registered locations, while many of them do not have identifiable promoters.

The capital markets regulator has been summoning auditors, compliance officers and key management personnel and officers of these companies, whose names exist on the documents submitted by them to the stock exchanges and other authorities to provide further details.

It is suspected that these companies might have been using the stock market platform to abuse the system for income tax avoidance and other money laundering related purposes.

These companies, which are listed on the stock exchanges and have been complying with all necessary disclosure norms by submission of financial and other details in time, caught the attention of Sebi after a sharp spurt in their share prices during the ongoing bull run.

While their upward stock movements were not supported by the fundamentals and financial positions of such companies, further inspections by Sebi showed that they were not even physically present at their disclosed locations and turned out to be largely shell entities or ‘only-on-paper’ companies.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition