For the past four years, the Securities and Exchange Board of India (SEBI) has been tying itself into knots over how to deal with cases of price manipulation for booking tax free long-term capital gains (LTCG). Its investigation department, partly at the prodding of the income-tax (I-T) department (which identified 64,000 entities that, allegedly, evaded Rs34,000 crore of tax—numbers that have not been established), probed 1,260 entities, barred them from buying or selling shares, forced them to sell 75% of their shareholding and deposit the amount in an escrow account. Later, it revoked action against 1,000 of these entities and released their money, while 250 others remain in limbo.
Meanwhile, SEBI has done a flip-flop on the investigation itself. According to an internal information memorandum dated 29 December 2016, SEBI will not act against such cases because they are not under SEBI’s purview. Despite all this frenetic activity and board-level decisions, SEBI seems to have quietly buried the fact that its investigations revealed several members of the Singhal family of Bhushan Steel having been involved in tax evasion and the entire gamut of shady activities involved.
Did this escape SEBI’s attention? Bhushan Steel and its promoters have been in the news almost continuously for the past four years since SEBI began this investigation. First, there was the arrest of Neeraj Singhal for bribing the chairman of Syndicate Bank to get fresh loans. Bhushan Steel as well Bhushan Power and Steel were identified among the top 12 wilful defaulters. Bhushan Steel alone owed a whopping Rs40,000 crore to a consortium of 51 banks and has, since, been sold off to Tata Steel under bankruptcy proceedings, but still at a loss to lenders.
Shouldn’t all this have invited SEBI’s scrutiny into the Bhushan family’s personal shenanigans in the dubious business of tax evasion? Our email to SEBI in this connection has been ignored; but here are the details.
SEBI issued an elaborate interim order in respect of 12 entities connected with LTCG booking. These are: First Financial Service Ltd, Kailash Auto Finance Ltd, Kamalakshi Finance Corp Ltd, Kelvin Fincap Ltd, Mishka Finance and Trading Ltd, Moryo Industries Ltd, Pine Animation Ltd, Radford Global Ltd, Eco Friendly Food Processing Park Ltd, Esteem Bio Organic Food Processing Ltd, Channel Nine Entertainment Ltd and HPC Biosciences Ltd. Names of the Singhal family members were thrown up in four of the 12 orders as preferential share allottees. First Financial Ltd lists Brij Bhushan Singhal, Neeraj Singhal and Uma Singhal as preferential share allottees. Pine Animation lists Brij Bhushan Singhal, Ritu Singhal, Neeraj Singhal and the HUFs of Brij Bhushan Singhal and Neeraj Singhal; Mishka Finance Limited lists Brij Bhushan Singhal, Ritu Singhal and Neeraj Singhal; while HPC Biosciences lists Ritu Singhal. Brij Bhushan Singhal’s name figures repeatedly in the list of allottees.
The SEBI order in Pine Animation, where the Singhal family figures prominently, examines price ramping operations between 22 May 2013 and 30 January 2015 accompanied by massive trading volumes. It notes how the company, with a share capital of Rs3 crore, made multiple preferential allotments, first to 49 entities and then innumerable related parties, through layered transactions and the Rs10 face value shares were split into 10 each, to allow dispersal. None of this activity was based on fundamentals; this indicates a classic technique for tax avoidance transactions. There are very similar findings in the other cases.
Now, let us understand how the tax evasion worked and the significance of these preferential allotments, in a set of completely unknown entities.
Moneylife had done an entire Cover Story on this rampant tax evasion (“
Black to White”, 20 January 2017) for those who want details; it is available online. In a nutshell, here is what the article said.
- The game used to start with the ‘beneficiaries’ and operators coming together to run a massive operation to book LTCG.
- The operator, for a commission, managed the racket by identifying a listed shell company with a small capital base, low share price, almost no public shareholders or genuine business.
- The existing promoters moved out and those wanting to evade tax bought the shares, usually through preferential allotment. We will call these tax-evaders, ‘beneficiaries’ of the operation. An I-T investigation, which detailed the modus operandi says, the beneficiaries made their initial investment by cheque; but the entire amount invested by them is usually returned in cash by the operator or adjusted against payments to be received. These beneficiaries are promised 10 to 20 times the amount they had invested to become shareholders.
- The stock is then ramped up to astronomical levels, over a one-year period through circuitous transactions. The I-T department had asked why these transactions were not caught by SEBI’s highly sophisticated surveillance software; but we will come to that later.
- After a year, cash available with the beneficiaries is converted into cheque entries (laundered) by hundreds of small players who are part of the operators’ network. It is transferred to the account of ‘dummy buyers’ of the ramped-up shares.
- At this stage, the beneficiary’s stockbroker (who is fully in this game) helps conduct a series of synchronised trades, carefully selling at pre-determined prices (usually to a count of three) to ensure that their entries match. This sale helps the beneficiary exit at a high price and collect LTCG which used to be tax-free until the recent Budget of benefit 2018.
That the Singhal family members figure so prominently in four out of 12 select cases examined by SEBI ought to have led to a series of questions and other investigations. First, are the Singhals the only prominent industrial family involved in this tax evasion racket? Secondly, when it is clear that Bhushan Steel is listed among the top wilful defaulters, shouldn’t this have triggered a deeper investigation into the source of funds for these transactions? Were the funds diverted from the listed entity? Has SEBI made any attempt to find out? Was the involvement of the Singhals reported to the SEBI board once discovered? Remember, SEBI has representatives of the finance ministry, Reserve Bank of India and the ministry of corporate affairs on its board—all of them should have wanted to take the investigation forward under their regulatory jurisdiction. Was this suggested?
SEBI, as a regulator, gets away by maintaining a complete silence. This itself raises several issues about the use of SEBI’s extremely sophisticated and sensitive surveillance system, which flags price manipulation almost immediately. Moneylife has routinely reported massive price ramping of in our section called ‘Unquoted’ in every issue (https://tinyurl.com/yat9djvk). The data is publicly available without the need for sophisticated surveillance machinery. So SEBI, with the use of sophisticated systems, corporate reporting databases and disclosure requirements, should be able to catch price ramping and match the sharp price of small and thinly-traded companies with hardly any profitable assets (what we have done in hundreds of articles) in a matter of hours, if not minutes. Why then does SEBI’s investigation department crackdown on such manipulation only when its action is futile? Do SEBI officials lack an understanding of markets and the requisite competency/forensic and investigation skills to complete timely investigation? What is the training that the regulator provides its investigation officers dealing with highly sophisticated trading systems? Long delays are either a way of hiding incompetence, or possible corruption (as alleged in angry letters written to the vigilance department of the finance ministry). SEBI’s bungling of the investigation into Mehul Choksi’s involvement in price ramping of Gitanjali Gems (in cash and derivatives) also falls into this category. When will the regulator be questioned about its competence?
FM is after small/tiny people may save max 100 cr and leave Lac of Cr involved big fish he is mostly complicating the complete system I feel Congress government was 100 times better or atleast try to reshuffle FM and simplyfy the procedures/avoid harrasment.
Regards