Moneycontrol
Last Updated : Mar 08, 2018 02:49 PM IST | Source: Moneycontrol.com

Exclusive | I-T Department probing some recent SME listings for alleged money laundering

The I-T department is in the process of sending notices to around two dozen companies as well as ‘investors’ who subscribed to the IPOs

Tarun Sharma @talktotarun

The Income Tax department has started investigating recently-listed small and medium enterprises (SMEs) for suspected tax evasion/money laundering through misuse of the long-term capital gains (LTCG) tax exemption, sources told Moneycontrol.

Till January 31, 2018, there was no tax on long-term capital gains from equity investments. Starting February 1, LTCG attract a 10 percent tax.

The I-T department is in the process of sending notices to around two dozen companies as well as ‘investors’ who subscribed to the IPOs with a view to either evade tax or pass off unaccounted money as legitimate profits through share trading, sources said.

Some of the companies on the list include those which had got a clean chit from capital and commodities markets regulator SEBI, which too had been investigating a few SME companies.

SEBI had passed confirmatory orders in four SME scrips, where more than 254 entities were suspected of price manipulation. Eventually, 235 entities got relief.

The I-T department found that the modus operandi for manipulating the share price of stocks listed in the SME segment was the same as that for rigging penny stocks.

In addition to high networth individuals, there have been instances of promoters, politicians and bureaucrats dabbling in penny stocks to exploit the LTCG loophole. Recently, SEBI pulled up the promoters of Alok Industries, Bhushan Steel and Uttam Galva, and the ITD served an assessment order to ex-bureaucrat Bhure Lal, red flagging profits earned from trading in an illiquid stock.

I-T department had seen massive oversubscription, and many of the stocks rose sharply soon after listing. The upbeat mood in the stock market last year was a key factor fueling the rally, but market players say there have been instances where the upswing in stock price had mostly to do with market operators acting in collusion with the promoters.

I-T department is also probing the role of merchant bankers, who are suspected of providing ‘investors’ to subscribe to the IPOs of SMEs. These merchant bankers also have stock broking arms. Using dummy clients, the broking firms would manipulate the stock price, and thus help create paper profits.

This is how the LTCG loophole was being misused to create artificial profits.

Say investor X has undisclosed income on which he wants to avoid tax. He gets in touch with company Y which can help generate fake long-term capital gains.

Company Y issues shares at Rs 10 each and makes a preferential allotment to X.

The money which Y gets from X for the shares is routed back through a web of companies to X.

A year later, entities associated with Y manipulate the stock price and double the price to Rs 20. X sells his shares to these entities, who play the role of exit providers, on the stock exchange and gets the payment for it in cheque. X then pays an equivalent amount to the exit providers in cash. The cash leg of the transaction is where it becomes difficult for SEBI to prove that the whole operation was done with an aim to evade tax.
First Published on Mar 8, 2018 01:32 pm
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