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March 2017
 |
| Income Tax (The Total Investment & Insurance Solutions) |
The Income
Tax (I-T) department has initiated criminal prosecution against shell
companies, stock brokers, beneficiaries and operators involved in laundering
over Rs10,000 crore in Mumbai alone by manipulating listed penny stocks to
claim bogus long term capital gain (LTCG), says a report.
According to a report from Indian Express,
first such criminal case has been filed on 28 February 2017 against Mukesh
Ruia, promoter of Shekhawati Poly-Yarn Ltd, a listed entity. "The I-T has
alleged that Ruia laundered over Rs 17 crore between 2012 and 2014 through Unno
Industries Ltd, a listed penny stock and availed tax exemption by showing fake
long term capital gains," the report says.
Earlier on
24 January 2017, the Central Board of Direct Taxes (CBDT) had issued guiding
principles for determination of Place of Effective Management (POEM) of a
company with an intention to target shell companies and companies, which are
created for retaining income outside India although real control and management
of affairs is located within the country.
Coming back
to the action by the I-T Department, penny stocks are scrips of companies that
trade at very cheap price and have lower market capitalisation. In the case
against Ruia, the Department had alleged that he laundered over Rs17 crore
between 2012 and 2014 through Unno Industries Ltd, a listed penny stock and
availed tax exemption by showing fake long term capital gains, the newspaper
report says.
As per the
I-T Act, long term gain (holding period more than 12 months) from sale of
equity shares on stock exchange is exempt from tax. The Total Investment & Insurance Solutions
Citing a
filing in the Court, the report from Indian Express says, " the I-T
department has sought seven years of rigorous imprisonment under sections 276C
(1), 278 of the I-T Act and sections 120 B and 420 of the Indian Penal Code for
Ruia and six others — a Mumbai-based chartered accountant, three partners of a
brokerage firm and two 'dummy' directors of four shell companies — who assisted
Ruia in converting black money into white." The Total Investment & Insurance Solutions
The report
quoting court filing says, a Kolkata-based brokerage firm, Intellect Stock
Broking Pvt Ltd, allegedly helped Ruia buy 41.71 lakh shares of Unno Industries
in 2011 at Rs1.79 a piece through preferential allotment. The court filings
state that in the next two years, the owners of the brokerage, through
Kolkata-based shell companies Nimbus Vincom Pvt Ltd, Viewlink Dealer Pvt Ltd,
Vedant Commodeal Pvt Ltd and Touchwin Dealcomm Pvt Ltd, rigged the share prices
of Unno Industries through circular trading (buyers and sellers are connected)
in its shares. As a result, in 2013 share price of Unno Industries touched
about Rs38 a piece with Ruia’s stake valued at about Rs17 crore. Ruia then
funded the same shell companies, allegedly bringing in the black money into
these shell firms, which subsequently bought Ruia’s stake in Unno Industries,
the court filings state.
Ruia then
claimed tax exemption citing LTCG for the Rs17 crore he earned through trading
in the penny stock. The Total
Investment & Insurance Solutions
According to
Indian Express, investigation agencies have identified close to 30.000 shell
companies in Kolkata alone and most of them share the same office address and
employ dummy directors — typically 'people of no means' to act as fronts for
the main operators.
LTCG Scam: A Failure of SEBI's
Surveillance System
Over the
past seven years, Moneylife has been publishing reports of one case of market
manipulation in every issue. These cases do not require much effort to unearth.
We can start looking at the listed companies, alphabetically, and easily find
cases of illiquid, closely-held stocks, with no business to speak of, that are
rigged a few hundred percent. In other words, price-rigging for booking bogus
long-term capital gains is widespread and continuing with impunity.
Our
objective has to be to prevent such manipulation. But, from 2001, when the
Joint Parliamentary Committee (JPC) was enquiring into the Ketan Parekh scam,
up to 2015, when the Special Investigation Team (SIT) of the Supreme Court on
black money flagged this off, SEBI has been found lagging far behind the curve
in catching price-rigging. The
Total Investment & Insurance Solutions
Here is what
the SIT said, in 2015: "SEBI has recently barred more than 250 entities,
including individuals and companies, from the securities market for suspected
tax evasion and laundering of black money through stock market platforms… There
is an urgent need for having effective preventive and punitive action in such
matters to prevent recurrence of such instances."
The SIT had
recommended, "SEBI needs to have an effective monitoring mechanism to
study such unusual rise of stock prices of companies… We believe that with
effective and timely monitoring by SEBI a significant number of such instances
can be checked in time." This clearly means that SEBI has singularly
failed in its job, despite spending over Rs50 crore on installing sophisticated
real-time surveillance systems. The
Total Investment & Insurance Solutions
The only
action SEBI has taken, so far, is banning some entities from the stock market.
But SIT says, "Barring such entities from securities market would not be
of (sic) strong deterrence. In case it is established that stock platforms have
been misused for taking LTCG benefits, prosecution should invariably be
launched under relevant Sections of SEBI Act. Section 12A, read with Section 24
of the Securities and Exchange Board of India Act 1992, are predicate
offences." SIT went on to suggest that the enforcement directorate should
then be informed to take action under Prevention of Money Laundering Act for
the predicate offences. It is remarkable that SIT had to tell SEBI what it
should do in such cases!
In 2013,
Moneylife wanted to know how many cases of price manipulation, detected by
SEBI's integrated market surveillance system (IMSS) and data warehousing
business intelligence system (DWBIS), resulted in prosecution, or consent
orders, or were dismissed due to lack of evidence or were still pending
investigation. In a shocking disclosure, SEBI replied that it did not have
information relating to its market surveillance system!
SEBI has
spent crores of rupees on the so-called state-of-the-art surveillance systems,
IMSS and the more modern DWBIS. Earlier, SEBI had touted that the DWBIS project
will "exploit the power of modern technology in terms of computation and
speed of data analysis" and "host pattern recognition
algorithms", to crack insider trading. Despite all this hype and the
enormous amount of money spent, stock manipulation continues, right under
SEBI's nose. The Total Investment &
Insurance Solutions
Moneylife
had found out, in 2013 that 48 staff members are posted in the integrated
surveillance department (ISD) of SEBI, which houses the IMSS and DWBIS. The IMSS
contract value was of Rs20.55 crore. Then, SEBI adopted the Rs34.38 crore
DWBIS, which became operational in 2010. This is a lot of taxpayers' money and
nobody knows how effective the surveillance system is. Or if anybody in SEBI is
truly looking at all the cases triggered by the systems or are they doing it
selectively. Despite draconian powers and plenty of funds, SEBI is extremely
reluctant to act effectively against price manipulation and LTCG scamsters. The
Ruia case shows that maybe the revenue secretary has given up on SEBI and has
started using income tax team to go after stock manipulators.The Total Investment & Insurance
Solutions
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