SEBI steps up black money fight; busts gains through 'losses'

As it steps up its crackdown on tax evasion and laundering of black money through stock markets, regulator Sebi has busted an 'innovative' scheme wherein HNIs were incurring 'bogus losses' to offset tax liabilities.

The probe, which has resulted in an interim ban on 59 entities, including HNIs and their shell companies, found that more than half of these individuals and firms showed notional losses totalling Rs 338.3 crore through trading in illiquid stock options.

At the same time, the remaining entities generated 'bogus profits' to the tune of Rs 406.9 crore, which were largely done to show artificial increase in the networth of a private company or individuals, the probe found.

The 'bogus losses' were also shown for the purpose of tax evasion by offsetting the capital gains tax on business profits.

While a total of 34 entities showed having generated losses, the other 25 were found to be generating profits.

Further probe is continuing in the matter and the case has also been referred to the Income Tax Department for necessary action at their end.

Sebi has also referred the matter to the Financial Intelligence Unit and the Enforcement Directorate for necessary action on their parts.

Under its stepped-up surveillance mechanism, the Securities and Exchange board of India (Sebi) has come across several instances and internal alerts wherein a set of entities were consistently making loss by their trading in options on individual stocks.

Trading of these entities appeared abnormal because they were consistently seen making significant loss by their trades which were reversed with the same counterparties either on the same day or the next day.

In its interim order in the latest case, Sebi said its analysis of the stock options segment of BSE for the fiscal 2014-15 showed that there were several entities who consistently made significant loss and others who consistently made significant profit by executing reversal trades in stock options on the exchange.

In its probe, Sebi first identified the top entities making significant loss or profit by buying and selling equal units of stock options of a scrip.

It then checked whether trades happened at unreasonably low or high price or they were out of sync with the underlying price. Sebi also examined contribution of trades of the entities to total traded volume in the contract on those days and identified the quantum of such reversal transactions.

The entities which made a loss or profit of more than Rs 5 crore in the stock option segment on account of reversal transactions were shortlisted.

It was found that the loss-making entities were trading mainly in options on individual stocks which were thinly traded. The trades by these loss-making entities, in many cases, contributed to 70-100 per cent of total traded volume for the contracts on those days.