By TIOL News Service

NEW DELHI, JULY 25, 2015: IN its third report the Special Investigation Team on Black Money has come out with detailed observations on how share prices are rigged and tax-free long-term capital gains are laundered out of India.

The Report observes, "3.22 Investments are made in the secondary share markets with a view to capturing gains. In this market, out of nearly 8,000 listed companies, several scrips are not traded regularly. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs, and sales at exorbitant prices, with a view to receiving money on sale as ‘capital gain' when the long term gain is subjected to a ‘nil' or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax."

SEBI has recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms. In one such instance price of a scrip rose from Rs. 10.20 to Rs. 489 in 150 trading days - a rise of 469 %.

The SIT obtained the background details of these cases and studied them. A typical pattern is as follows:

++ A company with very poor financial fundaments in terms of past income or turnover is able to raise huge capital by allotment of Preferential allotment of shares is made to various entities.

++ There is a sharp rise in price of scrip once the preferential allotment is done. This is normally achieved through circular trading of shares among a select group of companies. These groups of companies often have common promoters/directors.

++ The scrips with thus artificially inflated price are offloaded through companies whose funding is provided by the same set of people who want to convert black money into white.

There is an urgent need for having an effective preventive and punitive action is such matters to prevent recurrence of such instances.

And the SIT has recommend the following measures in this regard:

++ SEBI needs to have an effective monitoring mechanism to study such unusual rise of stock prices of Companies while such a rise is taking place. The SIT understands that SEBI has a strong IT infrastructure which can generate red flags for such instances. Such red flags could be built upon trading volumes, entities which contribute to trading volume, financial background of firms through their annual returns and any other indicators SEBI may develop. We believe that with effective and timely monitoring by SEBI a significant number of such instances can be checked in time.

++ Once such instances are detected, SEBI should invariably share this information with CBDT and FIU.

++ Barring such entities from securities market would not be of strong deterrence in itself. In case it is established, that stock platforms have been misused for taking LTCG benefits, prosecution should invariably be launched under relevant sections of SEBI Act. Section 12A read with section 24 of the Securities and Exchange Board of India Act 1992 are predicate offences.

++ Enforcement Directorate should then be informed to take action under Prevention of Money Laundering Act for the predicate offences.

Also See : simply inTAXicating - Black Money Compliance Window

simply inTAXicating - Black Money, an Overview

simply inTAXicating - It's Raining Black

simply inTAXicating - Black Money Bill