SEBI, says a media report, is pursuing schemes to turn black money into white, something that Moneylife has been persistently pointing out for five years at least
Market regulator Securities and Exchange Board of India (SEBI) is reportedly probing several small companies listed on stock exchanges for their role in enabling conversion of unaccounted cash into legitimate money. Moneylife has been writing for years about precisely such rampant manipulation in such small companies to convert black money into white but SEBI has not bothered to investigate these cases, even as it has constantly tinkered with rules regarding market manipulation and claimed dubious success to controlling such activities. Now, says a media report, after receiving a 'tip-off' from the Income Tax (I-T) department, SEBI seems to have woken up from deep slumber.
According to a report from Economic Times, SEBI received a tip-off from the I-T department that several entities were using the preferential allotment route for claiming long-term capital gains, which on stocks and equity mutual funds are not taxed if held for more than one year.
"Companies sell shares through a broker or make a preferential allotment to the tax evader. The transaction is executed by paying cash. After one-year lock-in period, preferential shares are converted and broker buys back the shares from the client, clocking legitimate long-term capital gains. Typically, the broker sells shares of these paper companies at a low price. He takes cash from the client and routes it through a number of accounts. The share price of the company is boosted through circular trading.
Later, the broker buys the shares back from his client at a higher price. Essentially, the broker has routed the client's own money back to him. Now, the client can show this as legitimate long-term capital gains in his income tax return — a gain which is tax free," the report says.
Moneylife has been writing on the rampant stock manipulation in small, listed companies that are nothing but schemes to convert black money into legitimate white money because capital gains from long-term returns from stocks is tax-free. Read: Stock Manipulation. However there has hardly been any action by either SEBI or stock exchanges like BSE and National Stock Exchange (NSE), who are the first line regulators. The menace is so rampant that Moneylife routinely comes across companies, mostly with poor fundamentals and a track-record of transgressions, whose share prices are brazenly manipulated, making a mockery of SEBI’s surveillance system. We are easily able write at least one such case every issue. Do check out the Unquoted section of the magazine and website. You will be alarmed and shocked to see the ease with which price manipulation goes on in the stock markets.
For example, Exdon Trading Company Ltd risen 6,587%, or 67 times, to hit Rs296.25 on 28 November 2014 from Rs4.43 on 3 October 2013. Similarly, over a one-year period, the share price of Maa Jagdambe Tradelinks (MJT) had gone up nearly 5,799% or 60 times to Rs99.10 from just Rs1.68! This company was even suspended in the past for not complying with the listing agreement. However, this did not result in any disciplinary action against the company by either the stock exchanges or the market regulator.
Despite revenues of just Rs78 lakh over four quarters, Pearl Electronics Ltd (PEL) stock was up 7,579%, or 76 times, to Rs43 as on 4 September 2014, from Rs0.56 as on 19 March 2013. While the stocks of PEL and Pearl Agriculture Ltd from the same group are being brazenly manipulated, SEBI and Exchanges could not care less.
Moneylife even did a cover story on this, which can be accessed here: Stock Manipulation.
Earlier in August, Finance Minister Arun Jaitley had a meeting with SEBI Board. Later when asked about the surveillance functions of SEBI, Sinha told reporters that the market regulator also presented before the board a report on all such actions taken by it during the last quarter.
This is the same SEBI, which last year in June, declined to provide information on its real time market surveillance system. Moneylife had filed an application under the Right to Information (RTI) Act on 9 April 2013, requesting information on SEBI’s surveillance statistics and had asked SEBI to disclose the number of suspicious cases its sophisticated Integrated Market Surveillance System (IMSS) and Data Warehousing Business Intelligence System (DWBIS) had detected till 31 March 2013.
In its reply, the SEBI said, “It is informed that the information sought by you is not available with the concerned department of SEBI.” This was impossible, because if the surveillance department did not have such information, then who did? Who was really in charge of monitoring the data captured by the surveillance department?
It must be noted here, that SEBI had spent a whopping Rs50 crore in installing the so-called “state-of-the-art” surveillance systems: IMSS and the more modern DWBIS.
India is now at a stage where financial institutions are committing criminal offences and assisting their clients in the process of money laundering on a regular basis. The regulators and law enforcement agencies do not appear to have the will or resources to prosecute those involved criminally. Many financial institutions either turn a blind eye or positively collude with clients to place suspect finance in offshore jurisdictions through shell companies, with nominee directors making it very difficult to discover the true beneficial owner.
Earlier, EAS Sarma, former secretary to the Government of India (GoI) had sent a suggestion to ministry of corporate affairs (MCA) on the increasing menace of shell companies with a suggestion to tighten the procedure of registration of companies to pre-empt unethical persons indulging in money laundering. A copy of this letter was marked to the SEBI chairman.
What is more shocking is the use of shell companies to turn black money into white is not limited to businessmen alone. Several politicians are found using the same route, although for companies that are not usually listed.
As Moneylife has reported earlier, it was common in Hyderabad for politicians to sell their stakes in companies controlled by them to big businessmen at a huge premium. In return, they got access to natural resources (like iron ore) or land for infrastructure projects. The CBI has also quizzed N Srinivasan of India Cements, who was also allegedly using the quid pro quo model, for funding Jaganmohan Reddy, in return for limestone allocations. A similar arrangement with the Gali brothers of Bellary, who were ministers in the Karnataka government, had been scrapped few months back.
These are not the only examples. Former Jharkhand Chief Minister, Madhu Koda, who ripped off Rs4,000 crore for the State’s rich mineral resources is also understood to have used a string of companies to transfer wealth abroad.
Investigators have also found a link between him and erstwhile Maharashtra Congress minister Kripashankar Singh, who began life as a vegetable vendor and turned enormously wealthy as a politician.
Interestingly, many of the companies that have funded politicians in return for massive land, infrastructure contracts or other goodies are listed entities. The dubious investment companies have all been floated because the Ministry of Corporate Affairs (MCA) pays no attention to what is happening under its watch.
Thanks to lax laws on the subject of deeper enquiry on who or what is really behind a company, the business of khoka and shell companies have brought India to a point where we already do not know who or what is behind the major airlines, airports, telecom provides, seaports, hotels, highway toll collectors, real estate companies and similar. Likewise, we do not know who or what is behind the mysterious army of consultants and analysts providing multiple services at great costs to our country and those who would govern us. We do know, however, that large amounts of money flow in and out in this way, changing colour and provenance at every step, while the regulators either turn a blind eye or did not want to come out of their deep sleep.
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Reserve Bank of India has imposed monetary penalty on ICICI Bank and Bank of Baroda for violation of its instructions on KYC
RBI (Reserve Bank of India) imposed a penalty of Rs50 lakh on ICICI Bank and Rs25 lakh on Bank of Baroda for violation of KYC (Know Your Customer) norms after they allowed opening of accounts in the name of a statutory body by fraudsters.
The Reserve Bank also cautioned SBI, Axis Bank and State Bank of Patiala in the same case.
"The RBI has imposed monetary penalty on the two banks for violation of its instructions, among other things, on know your customer/anti money laundering Know Your Customer (KYC) /Anti Money Laundering (AML)," the central bank said in statement.
Giving details, RBI said it had received a complaint from a "reputed statutory organisation" in August, 2013 through which the details of a fraud perpetrated in five banks -- SBI, ICICI Bank, Bank of Baroda (BoB), Axis Bank and State Bank of Patiala -- with the connivance of certain officials of the statutory organisation were brought to its notice.
The fraudsters, it said, had managed to open fictitious accounts in the name of the statutory organisation in the five banks.
The accounts were mainly operated for encashing cheques/ demand drafts/postal orders of which they were not the rightful owners, for periods ranging from one month to two years, without being detected by the banks.
A scrutiny was undertaken in the five banks in January, 2014 and based on the findings, the RBI issued a show cause notice to each of these banks. The individual banks submitted written replies.
"After considering the facts...The RBI came to the conclusion that some of the violations of serious nature were substantiated and warranted imposition of monetary penalty... on two banks, namely, ICICI Bank Ltd. And Bank of Baroda.
"Failure on the part of these banks to take timely remedial measures had aggravated the seriousness of the contraventions and their impact," the statement said.
In case of the three remaining banks, RBI said it was decided not to impose any monetary penalty as the "banks' explanations regarding the circumstances which led to the fictitious accounts getting opened and operated without detection, was judged to be reasonable".
However, these banks have been cautioned to put in place appropriate measures and review them from time to time to ensure strict compliance of KYC requirements, RBI said.
RBI said its scrutiny of the banks revealed violation of certain regulatory guidelines, including non-adherence to certain aspects of KYC norms like customer identification and acceptance procedure and non-adherence to instructions on monitoring of transactions in customer accounts.