Sebi widens probe into market use for black money

As Sebi widens its probe into use of stock market platforms for evading taxes and laundering black money, a large number of small NBFCs and brokers have come under its scanner for having facilitated illicit transactions worth thousands of crores of rupees over the past 2-3 years.

It has emerged during initial 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, sources said.

Those under the scanner also include select listed companies 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 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.

In its biggest ever crackdown for suspected tax evasion and laundering of black money through stock trading platforms, Sebi on Friday barred 260 entities, including individuals and companies, from the securities markets.

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

While 152 entities have been barred in one case relating to an entity named First Financial Services Ltd, another 108 entities have faced the action in a case related to Radford Global Limited.

The action came 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.

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

In the First Financial case, the debarred entities include this company itself, its seven promoters and directors, 80 'preferential allottees', 57 First Financial Group entities, as also seven others suspected to be related entities.

With regard to Radford case, Sebi has barred the company, four directors, one promoter entity, two directors of a group firm, 49 preferential allottees, 39 Radford Group entities, five 'suspected entities' and seven others.

Sebi found a typical pattern in trading of shares of these companies. First shares were 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.

While overall gains made by all 260 entities could not be ascertained, a batch of 46 allottees in Radford case made a collective profit of Rs 313.01 crore on a total investment of just Rs 12.99 crore -- getting a return of 2309 per cent in a period of 18 months.

In First Financial shares, a batch of 80 allottees made a collective profit of Rs 172.21 crore on a total investment of Rs 14.50 crore, earning a whopping return of approximately 1087 per cent in a period of 20-24 months.

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

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 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.