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First-ever prosecution for illegal profits via penny stocks

Shell companies, stock brokers, beneficiaries and operators allegedly laundered more than Rs 10,000 crore in Mumbai alone by manipulating listed penny stocks to claim bogus long term capital gain, according to a report in The Indian Express.

March 06, 2017 / 10:20 PM IST
 
 
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In an unprecedented move, the country's Income Tax department has begun criminal prosecution against entities making illegal profits through penny stocks, according to a report in The Indian Express.Penny stocks trade at a low price (usually below Rs 10) and their market capitalisation is small.Shell companies, stock brokers, beneficiaries and operators allegedly laundered of more than Rs 10,000 crore in Mumbai alone. They are accused of manipulating listed penny stocks to claim bogus long term capital gain, sources were quoted as saying.Currently, any capital gains from shares held for more than a year are fully exempt from paying taxes.Typically, the modus operandi works like this: a promoter or an investor in a company issues share through a preferential allotment to a party that wants to launder money. Both parties rig the share price in connivance with brokers through means such as circular trading. More than a year later, with the stock price having risen, the preferential allottee sells shares, claiming exemption from capital gains tax. The first party, with clean money, makes a payment to the second party in cash.ALSO READ - Union Budget 2017-18: Jaitley tightens screws on money launderers using stock marketMukesh Ruia, promoter of the listed Shekhawati Poly-Yarn, became the first party to be prosecuted in this matter on February 28. Ruia allegedly laundered more than Rs 17 crore between 2012 and 2014 through Unno Industries, a listed penny stock. He availed tax exemption by showing fake long term capital gains.A person familiar with the case that the criminal prosecution is expected against more such entities and shell firms.According to court filings, the I-T department has sought seven years of rigorous imprisonment for Ruia and six others — a chartered accountant from Mumbai, three partners of a brokerage firm and two “dummy” directors of four shell companies — who assisted Ruia in converting black money into white.ALSO READ - Black Money War: Two lakh shell companies under RoC scanner for money laundering
The development comes amid a concerted effort from the government to crack down on shell companies.More than 2 lakh inactive companies are under the scanner of the Registrar of Companies (RoC) as the government looks to crackdown on shell companies used for evading taxes. The companies identified by the RoC have not been complying with the rules of the Companies Act. These companies will be shifted into dormant category for the next two years, a source told Moneycontrol. On Saturday, Central Board of Direct Taxes (CBDT) Chairman Sushil Sharma said that several dubious companies were under its radar and if found to be shell firms, they would be removed from the website of Ministry of Corporate Affairs.