Moneylife has been highlighting rampant manipulation in penny stocks for the last seven years, but there has been no action by SEBI. The CBDT has now been forced to issue a direction seeking information on investment in penny stock where prices were rigged
The Central Board of Direct Taxes (CBDT) has issued instructions to carry out detailed enquiry of taxpayers who had invested money in penny stocks, whose share prices were artificially raised for booking bogus claims of long term capital gains (LTCG) or short term capital loss (STCL) by various beneficiaries.
The order issued on 16 March 2016, says, "...the said instruction is in the context of investigation conducted by Kolkata Investigation Directorate in respect of large number of penny stock companies, whose share prices were artificially raised on the Stock Exchanges in order to book bogus claims of long term capital gains or short term capital loss by various beneficiaries. Extensive investigation, including search and seizure/ survey action on entry providers, riggers, beneficiaries etc. was conducted by the Investigation Directorate in such cases. Based upon outcome of such investigation and analysis of the data, the Systems Directorate has now uploaded details of such information in respect of individual assessees who have made transactions in such penny stocks."
"Vide EFS Instruction under reference a new button 'Penny Stock' has been added on Individual Transaction Screen (ITS) to display information related to penny stock, now enabled on the screen of the Assessing Officers (AOs). Available information regarding the manipulative transactions has been captured in the functionality, including the investigation report of the Kolkata Investigation Directorate. The functionality also contains a guidance note for the Assessing Officers. Such details are visible to the AOs of those assessees whose particulars have emanated out of the investigation report of Kolkata Investigation Directorate and whose cases have been considered actionable, at this stage. The details are also visible to supervisory officers of such AOs," the order says.
However, the latest directions from CBDT follow a 'secret' letter from Shaktikanta Das, then revenue secretary, to the SEBI Chairman. In this letter sent last year, Mr Das has informed the SEBI Chairman about "investigation carried out by the Income Tax Department (ITD) showing regulated securities or commodities market mechanism being misused for large scale systematic tax evasion and round tripping of unaccounted funds... to generate fictitious LTCG."
"Such rampant manipulations call for concerted and coordinated action by the agencies concerned. SEBI's proactive role in the above context is crucial," Mr Das has written in the letter.
In December 2013, the SEBI Board approved the SEBI (Procedure for Search and Seizure) Regulations, 2013, made on the lines of the provisions in the Income Tax Act, 1961 and for providing the detailed procedures for such search and seizures by SEBI. This conferred direct powers on SEBI chief to authorize the investigating authority or any other officer of SEBI to search any premises where incriminating documents are lying and seize such documents for the purpose of investigation. The Ordinance also empowers SEBI to make regulations for executing the search operations and to ensure safe custody of any books of account or other documents that are seized.
However, nothing much happened despite SEBI gaining such powers.
In his letter, Mr Das further stated, "Investigations conducted by ITD in the transactions of the aforesaid nature could not bear the desired fruits inter alia for the reasons that in most of such transactions the regulators concerned such as SEBI did not record any adverse finding qua such transactions. Judicial authorities have held that unless the corporate veil is lifted, onus on revenue is not discharged. The action taken by SEBI in such cases unravelling the facade is of critical importance, in these cases for effective handling of menace of bogus LTCG."
Mr Das also highlighted the time limit on such cases. "...income-tax Act, 1961, prescribes time limits within which assessments can be completed and tax demands can be raised. Therefore, timely action from SEBI in such cases would help in ensuring appropriate actions by the Income Tax authorities. SEBI may take note of violations of KYC norms by the stock brokers for further appropriate action," he concluded.
Earlier, in 2014 and 2015, SEBI had grandly claimed that it has busted schemes, which misuse the stock market platform for money laundering. Obviously, what SEBI claimed as a huge crackdown on those two occasions, hardly scratched the surface.
Last year, to check market manipulation through penny stocks, the market regulator came up with and idea to create a new group T+ for scrips that are found to be prone to market manipulation.