Wealthy investors under Sebi scanner

High net worth individuals seen using illiquid stocks in options segment to evade taxes, manipulate markets; order likely soon

The Securities and Exchange Board of India (Sebi) is likely to act against several wealthy investors, for alleged manipulation of the stock exchange route for evading taxes. Sources said the market regulator had completed an investigation and was likely to pass orders against at least 50 entities, mainly high net worth individuals.

This will be a third such crackdown against market manipulators, looking to evade taxes or convert black money into white. The latest was in the stock options segment in the country’s nearly Rs 2 lakh crore derivatives market.

Sources said the regulator’s surveillance system detected a systemic tax evasion scheme, where low-value illiquid stocks in the options segment saw huge volumes unsubstantiated by adequate open interest in the options segment. It is estimated the evasion would be Rs 8,000 crore. The focus period of the said surveillance is a year starting 2014.

SEBI CRACKDOWNS

PAST
PENNY STOCKS  
Orders related to around 10 companies; 36 companies and 900 entities banned, estimated loss Rs 20,000 crore

SME MANIPULATION
Passed order against four companies that raised Rs 46.53 crore through their public offerings, of which Rs 30.06 crore, or 64.60 per cent of total IPO proceeds, were transferred back to all the entities

LATEST

• 50 HNIs on radar for tax evasion; estimated loss worth Rs 7-8,000 crore
   
• Investors under the options segment to trade in illiquid stocks
   
• Sebi to pass order against these HNIs, a reference to be made to the Enforcement Directorate, Financial Intelligence Unit and income tax department

The order would be an interim one, with a reference  being made to the enforcement directorate, income tax department and Financial Intelligence Unit, for investigating a probable money laundering scheme.



Sebi's action is likely to be on big bulls who have been using the derivatives platform for market manipulation and tax evasion. "Our surveillance system may have detected such discrepancy and are looking into the matter," said a high ranking Sebi official.

Sources said names of some well-known investors were likely to feature in the Sebi order.

A request for comment from the regulator did not elicit a response. In a recent interview with Business Standard the Sebi chief highlighted that it is continuous fight.

In a recent interview with Business Standard, the Sebi chief said this was a continuous fight. “I suppose some entities are manipulators by design. They are smart enough to find loopholes in regulations. When Sebi clamped down on Initial Public Offering manipulation, these entities started exploiting the global depository receipts (GDR) market. When the GDR loophole was plugged, they came to the secondary market. Now, as we speak, they might be looking at some other route. But, our surveillance systems are strong and we would be able to track it,” said U K Sinha, chairman, Sebi.

Through the use of the provision on long term capital gains, certain operators have been actively helping small value companies and their promoters to evade tax and manipulate the markets.

So far, the regulator has cracked down on two schemes. One was the use of equity trading in penny stocks and the other was the use of the small and medium enterprises (SME) platform.

Rajeev Kumar Agarwal, wholetime member, Sebi, has issued around 10 orders, with 36 companies involved in irregular trades being suspended and 900 entities barred. According to estimates, the money involved in these orders adds to Rs 20,000 crore.

The investigation into market manipulation showed companies with poor financial fundamentals raising huge capital by allotment of preferential shares to various entities. This is followed by a sharp rise in share prices, once preferential allotment is carried out, through circular trading. The artificially inflated stocks are then offloaded through companies funded by those seeking to convert unaccounted money into ‘white’ money.

In the case of the SME platform, listed on the BSE exchange's, Sebi said four companies collectively raised Rs 46.5 crore through their public offerings, out of which Rs 30.1 crore, or 64.6 per cent of total IPO proceeds, were transferred back to all the entities which had funded these IPOs either directly or through layering.



The funding entities had cumulatively financed the subscribers in the four companies to the tune of Rs 17.62 crore and received Rs 30.06 crore from them immediately after the IPOs.

Tax evasion and money laundering through the stock market route was highlighted by the Special Investigative Team on black money. It had said it wan't satisfied with a ban on such entities and these should be prosecuted under the Sebi Act.

Prosecution against these entities would happen only once investigation is complete. Ban orders are interim measures to stop these entities from further manipulation. Under section 11 and 11B of Sebi act the regulator can pass orders against entities banning them to protect the investors from manipulative activities.

In the SIT report the report it was also highlighted that Sebi should pass such information to The Enforcement Directorate to take action under the Prevention of Money Laundering Act for the predicate offences.