Moneycontrol
Feb 12, 2018 09:18 AM IST | Source: Moneycontrol.com

SC ruling on synchronised trades could prompt SEBI review of bogus LTCG trades

Synchronised trades are pre-planned trades, done with a motive which could either be genuine or dubious.

Tarun Sharma @talktotarun

The Supreme Court on Thursday upheld an adjudication order by SEBI in a 2007 case, penalising a group of investors and brokers for punching in synchronized trades in illiquid Nifty options, solely for the purpose of tax evasion by creating artificial profits/losses.

This order could have a bearing on other cases where SEBI granted relief to investors who have transacted on the stock exchange platform with the intention of either suppressing their tax liability or converting black money into legitimate income. These trades were done in connivance with brokers who help generate fake long term capital gains which used to be tax free till last month, or generate fake short-term losses which could then be offset again short term profits.

Synchronised trades are pre-planned trades, done with a motive which could either be genuine or dubious.

The Securities Appellate Tribunal had overruled the adjudication order against the above mentioned entities through a series of orders in 2009 and 2010, saying there was nothing illegal about synchronised trades, as long as they did not distort price discovery and affect other investors. SEBI then appealed the SAT ruling in the Supreme Court.

“The impugned transactions are manipulative/deceptive device to create a desired loss and/or profit,” the Supreme Court order said.

“Such synchronised trading is violative of transparent norms of trading in securities. If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside,” the order said.

According to sources, SEBI so far has given relief to 68,000 entities suspected of evading taxes/laundering money through transactions in dubious stocks in the cash segment. Last year, the regulator had told the Income Tax Department that going after tax evaders was outside the purview of its powers. SEBI could only take action where it had proof of stock prices being manipulated and other investors being affected as a result of the manipulation.

Dubious companies would issue shares which would be subscribed to by investors wanting to show fake long term capital gains. Through circular trading between related entities of the company promoter, the price of the stock would be inflated. A year later the investor would sell the shares to promoter entities at the inflated price, and show the profit as long term capital gains. However, the ‘profit’ would be returned to the promoter in either cash or through another set of fake transactions—not necessarily through the stock exchange platform.

SEBI found it hard to pin charges of tax evasion because it had no way of proving that these offline cash transactions had happened, and in many cases, found it tough to prove even stock manipulation.

Still, there were another 15,000 cases of synchronised trades in illiquid options contracts where the regulator had given relief to the entities involved. Synchronised deals are relatively easier to prove as being manipulative, even if does not hurt other investors.

Strangely, SEBI has taken action against 59 entities, through an interim order slapping trading restrictions and freezing their demat accounts.

Some of the entities at the receiving end of this order demand that action should be taken against all 15,000 entities which have done synchronised trades.

Interestingly, the Supreme Court has not mentioned the tax evasion angle in its judgement, while making it clear that the synchronized trades did affect the integrity of the market.

“No grounds have been raised in the show cause notice alleging that the impugned fictitious transactions have been entered into with a view to avoid payment of tax and was an act of tax planning. Adjudicating officer also has not gone into this aspect. Hence, I am not inclined to go into this aspect, whether the impugned transactions were intended to reduce the brunt of taxation and an act of tax planning,” the Supreme Court ruling said.

A source in the Income Tax department, who prepared the report on tax evasion through misuse of long term capital gains, told Moneycontrol: “There has been massive tax evasion through fake LTCG. However, SEBI has given a clean chit to almost every entity. This makes it difficult for us to sustain such cases in courts. It is not just high networth individuals and big businessmen who were misusing LTCG; many senior bureaucrats have used the stock exchange platform to convert their ill-gotten wealth into legitimate income.”

It now remains to be seen if SEBI will reopen the cases relating to synchronised trades in illiquid options contracts.

tags #markets

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