Black money probe team pulls up Sebi

Asks market regulator to check creation of such wealth via stock exchanges, P- notes

A Supreme Court- appointed special investigation team (SIT) on unaccounted money has come down heavily on the creation of such funds through stock exchanges and participatory notes ( P- notes). In a report, the SIT said the Securities and Exchange Board of India ( Sebi) should have an effective monitoring mechanism to study unusual rises in stock prices and the use of stock exchanges to evade taxes through long- term capital gains.

Sebi has also been asked to put in place a mechanism to monitor the beneficial owners of P- notes.

The SIT has recognised the recent steps taken by the regulator to scrutinise cases of tax evasion through exchanges.

Sebi has been sharing such information with the income tax department.

Now, the SIT has directed it to share that with the Financial Intelligence Unit, too.

The investigation into market manipulations shows the modus operandi involves 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.

Recently, Sebi had barred about 250 entities, both individuals and companies; the overall funds involved in this could be Rs.20,000 crore.

The SIT, however, isn’t satisfied with a ban on such entities, advocating these entities be prosecuted under the Sebi Act. “ The Enforcement Directorate should be informed to take action under the Prevention of Money Laundering Act for the predicate offences,” said the report.

Sources said Sebi had sent a list of violations by companies in the small and medium enterprise platform to the income tax department, adding the investigative agency had already started aprobe against these entities. As of now, Sebi is examining 100 additional companies, for which interim orders would be passed. Here, overall illicit gains could be to the tune of Rs.50,000 crore, regulatory sources said.

Though Sebi is considered to be heading a multiagency probe on black money creation in domestic markets, the regulator has been criticised for not intervening in these cases on time. This, too, was highlighted in the SIT report. “ We believe with effective and timely monitoring by Sebi, a significant number of such instances can be checked in time,” the report said.

Business Standard, New Delhi, 25th July 2015