Stock Manipulation
Unquoted: High Ground Enterprises (Rs34)

High Ground Enterprises is supposedly into entertainment and film production. Known as Woo Yang Electronics (India) until 2010, its name was changed to the current one, a commonly adopted tactic by many businesses with poor fundamentals. The financial results of this company have been erratic. Net sales for the March 2012 quarter stood at Rs1.84 crore before going down to Rs65 lakh for the June 2012 quarter and  Rs1.88 crore for the September quarter. Then suddenly sales shot up to Rs8.15 crore for the December 2012 quarter before doubling to Rs16.83 crore for the March 2013 quarter. Similarly, its net profit has also been erratic. It recorded a huge loss of Rs51 lakh in the March 2012 quarter and then went back into the black the following quarter before tanking again into the red; net profit in the December 2012 quarter stood at Rs1.44 crore before settling at Rs95 lakh for the March 2013 quarter. The stock of such a small and erratic operation has been among the best performers in the past six months. The price rocketed a humungous 562%, from Rs4.7 to Rs31.10, between November 2012 and May 2013. The company issued preferential shares thrice, diluting the equity base. What are BSE and SEBI doing about this incredible price rise? Nothing. 

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I-T dept may do away with paper scrutiny of tax returns

The new measure, expected to be operational within this financial year, will save the taxpayer from the hassle of sending the paper document by post and tracking its acknowledgement

Millions of taxpayers who file income-tax (I-T) returns in electronic form may no longer have to post the ITR-V form to Bangalore. The Central Board of Direct Taxes (CBDT), the administrative authority of the income-tax department, will now instead introduce electronic verification of these online returns.

 

The new measure, expected to be operational within this financial year, will save the taxpayer from the hassle of sending the paper document by post and tracking its acknowledgement.

 

“E-filing was meant to make taxpaying easier for people. But compulsory dispatch of paper documents by post to the Bangalore-based central processing centre of the department or procuring a digital signature was undoing this. Hence, the department has decided to end this soon,” a senior official said.

 

The department has been receiving a number of complaints from taxpayers with regard to following these rules and also was getting suggestions to do away with paper documents and make e-filing more user-friendly, he said.

 

When taxpayers file returns online, they are required to send an ITR-V by ordinary post to the I-T department’s CPC, based in Bangalore. It then sends an electronic acknowledgement to the tax return filer.

 

In case of digital signatures (used by corporate entities), a bonafide statement that verifies the identity of the sender are required to be created by paying a fee and requires regular renewal.

 

The CBDT, according to the official, has decided to stop the practice as it wants more and more people to file e-returns and it is also bolstered by the huge spurt in e-filing numbers being recorded every year.

 

During 2012-13, a 31% jump was seen in e-filings by taxpayers as 2.14 crore entities filed returns online as compared to 1.64 crore in 2011-12.

 

Recently, the CBDT has made e-filing mandatory for those with an annual income of Rs5 lakh or more for the financial year 2012-13 and assessment year 2013-14 and with the addition of this category of taxpayers the department expects a huge surge in the number of online filings.

 

The department also wants to introduce “new concept of third party validation of utilities developed for e-filing which will avoid mistakes in returns and bring uniformity in the interpretation of tax laws in filing of returns”.

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Monitoring politically exposed persons: Need for a new approach by RBI

It is quite common for politically exposed persons to camouflage their financial interests using legal entities. There exists a real possibility that you may already be doing business with these people through a legal entity. The RBI needs to act swiftly on domestic PEP front to ensure better compliance on money laundering

Politically exposed persons (PEPs) have been identified as high risk customers for banks and financial institutions for money laundering activities. Because of the risk profile of these customers, the Financial Action Task Force (FATF) and other international bodies acting in the areas of prevention of money laundering and terrorism financing activities have asked banks and financial institutions to carry out enhanced due diligence (EDD) for these customers. Enhanced due diligence involves digging deep into a person’s history and relationships to verify the identity of persons carrying higher risks. The objective of EDD measures in the context of PEPs are that they are identified at the time of account opening and banks and financial institutions carry out an ongoing check for transactions performed by these clients so that they are able to launder money across world.
 

Till recently, definition of PEP only covered international PEPs. As per initial definition of PEPs by FATF, “‘Politically Exposed Persons’ (PEPs) are individuals who are or have been entrusted with prominent public functions in a foreign country, for example heads of state or of the government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior individuals in the foregoing categories”.
 

  • In February 2012, the FATF issued a revised set of its International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, better known as the “40 Recommendations”, which expanded the definition of PEPs to include both domestic and international PEPs. The FATF definition of a domestic PEP is as follows,”Domestic PEPs are individuals who are or have been entrusted domestically with prominent public functions, for example heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials”.
     

The Reserve Bank of India (RBI) issues master circular every year on AML/KYC detailing the steps that banks and financial institutions regulated by RBI are supposed to carry out in order to effectively implement AML/KYC measures. The last master circular of the RBI on AML.KYC issued on 2 July 2012 expects banks to monitor only foreign PEPs and there is no mention of domestic PEP in the circular. The circular also excludes foreign PEPs in India. It is important to note that India is a member of the FATF and as a member country; it is supposed to implement the FATF guidelines. More than a year has passed since the FATF came out its revised guidelines, but the RBI is yet to come out with a circular on domestic PEPs.
 

What is it that is preventing the RBI to issue guidelines to banks and financial institutions regulated by it from monitoring domestic PEPs? Are there regulatory hurdles? Or is it that the otherwise self-proclaimed independent body on repo and reverse repo rate determination i.e. RBI is scared to take an independent view on determination of domestic PEPs because of the fact that a big list of who is who is involved in the list. It is important to note here that the PEP list does not alone cover politicians and includes other prominent officials as mentioned in the definition above.
 

In order to ensure that we are able to effectively monitor PEPs across the country, we as a country will need to create an extensive framework for monitoring PEPs and ensure that money laundering by them gets substantially controlled. Let us look at some of the steps we need to follow to ensure that PEPs are indentified in India:
 

Define and widen the scope of PEPs: As of now, India only follows the definition of the FATF in identification of PEPs and that too partially as domestic PEPs are not covered. A major misconception regarding PEPs is that one should only be concerned about individuals when identifying PEP risk. A FATF consultation paper issued in 2002, however, indicates that “the proceeds of corruption are typically transferred to a number of foreign jurisdictions and concealed through private companies, trusts or foundations.” The World- Check on PEP identification says, “It is quite common for PEPs to camouflage their financial interests using legal entities and there exists a very real possibility that you are already most likely doing business with PEPs via a legal entity”. So what should be covered under PEP? Ideally PEP should not only cover the PEP definition that has been given by the FATF but it should also include, “private companies, trusts or foundations owned or co-owned by PEPs, whether directly or indirectly” as covered by World-Check.  If we broaden the scope of PEP by including entities related to PEPs, an organization like the BCCI (Board for the Control of Cricket in India) will automatically get covered under enhanced due diligence for monitoring of PEP. The RBI may consider including senior private sector employees, certain category of journalists, etc under PEP as well.

 

Building a database of politically exposed persons (PEPs): The most challenging aspect of identifying politically exposed persons is a common database at the national level. The challenge gets further compounded by the fact that the database needs to be dynamic. Let us understand this with an example. In India so many elections are held at different levels. With new people getting elected, the database of PEP needs to be modified continuously and there is a need of an entity which will carry out this activity. While the Election Commission can provide data for newly-elected representatives and the government can provide details of other categories of PEPs, it is difficult to identify the details of political party officials which keep on changing. Some people may not be affiliated to a political party but still can classify as a PEP. The RBI needs to work on modalities related to these exceptions, as well.
 

Empowering of banks, freezing of assets and punitive action: The RBI along with the government needs to empower banks and financial institutions to empower banks to carry out a detailed check of financial transactions of PEPs and also bring necessary provisions for at least temporary freezing of assets till the time investigation is initiated by the government agencies. Also there is a need for strict punitive action if PEPs are found to be involved in money laundering.
 

While it is true that many of the PEPs carry out money transfers without using the route of banks and financial institutions, however, profiling of  PEP accounts, wherever available can provide better control on money laundering activities originating and linked to these accounts. World over a need is being felt to have tighter control and enhanced due diligence on PEPs and that is the reason the FATF has included domestic PEP within the scope of PEPs. The RBI needs to act swiftly on domestic PEP front to ensure better compliance on money laundering front.
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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COMMENTS

CA PRADEEP AGARWAL

4 years ago

will RBI itself be able to monitor PEP unless politicians do help them in such ventures.

CA PRADEEP AGARWAL

4 years ago

will RBI itself be able to monitor PEP unless politicians do help them in such ventures.

Hemlata Mohan

4 years ago

If RBI cannot follow the requirements of FATF, India should stop saying it is a member of FATF.
Deliberately keeping the domestic PEPs out of the purview just does not make sense and some unsuspecting banker may be made the scapegoat!

CA PRADEEP AGARWAL

4 years ago

PEP's are there since a very very long time(but not exposed), if proof needed can see the ownership pattern of highly lucrative business ventures, so to stop them in there tracks is entering into direct conflict with the powers at the helm, so decide.

ANIL KUMAR JALOTA

4 years ago

It is not ONLY money laundering by PEPs which needs monitoring but also funding for their /their relatives /friends projects and subsequent write offs which should be closely monitored. Honest study for the last 2decades will reveal the damage.

ANIL KUMAR JALOTA

4 years ago

PEPs have milked the system using BANKING DEPARTMENT to instruct CMDs/EDs of PSBs to fund their enterprises. Political appointments are made in the form of directors who work as middlemen for their clients to earn money and get projects of PEPs approved however unviable the projects may be. Who otherwise would have given money to MALLYA to run Kingfisher? No wonder NPAs of PSBs have been skyrocketing and shall continue for some more tie. Pumping capital in PSBs is also tax payer money to help PEPs to milk system. MANAGEMENTS OF PSBs NEED TO BE STRONG TO KEEP SUCH PERSONS AT BAY. RBI KNEW IT ALL ALONG AND HAS BEEN A WILLING PARTNER.

KVenkatraman

4 years ago

Wishful thinking. How do you account for Mayawati's assets, any one will know, it has been amassed due to the CM's chair. Can you confiscate it ? Leave alone RBI even CBI will not be able to touch her.

Same true for all yester year's politicians, cash collected is invested in land, now they have opened colleges, capitation money will give good returns for the black money invested.

SuchindranathAiyerS

4 years ago

There is NO way that the wolves will protect the sheep. In India, the primary difficulty in all policies is that the VIPs are the criminals.

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