I-T Department, SEBI begin crackdown on penny stock firms in PMO-led push

The Income Tax Department and Securities and Exchange Board of India (SEBI) have intensified the crackdown on penny stocks after the Prime Minister’s Office (PMO) sent details of 80 scrips earlier this month.

The government’s two-pronged approach — investigation and regulation — involves action against tax evaders and tightening of norms for scrips prone to price manipulation. The PMO had sent a detailed list of penny stocks to the Central Board of Direct Taxes (CBDT).

The Income Tax Department has begun taking action against 18 of the Maharashtra-based penny stock companies. In fact, some of these firms were already under the I-T Department’s lens in investigations pertaining to the Income Declaration Scheme, sources told Moneycontrol.

The SEBI, on the other hand, is drawing up stringent rules for companies prone to price manipulation and widening the scope of Graded Surveillance Measures.

Graded Surveillance Measures (GSM) are applied to securities which witness an abnormal price rise not commensurate with financial health and fundamentals.

These measures, aimed at enhancing market integrity, include reduction in price band, periodic call auction and transfer of securities to Trade to Trade category from time to time.

The regulator also plans to write to the Finance Ministry seeking withdrawal of long-term capital gains tax benefit for trades under GSM category. The SEBI wants penny stocks companies with market cap lesser than Rs 10 crore and free float market cap under 1 percent to be placed under the GSM category. “This mechanism will help identifying those companies which have been prone to manipulation,” another person privy to the developments told Moneycontrol.

“As per my knowledge, about 95 percent of the top 500 scrips trade on the NSE and 90 percent on BSE,” another source said.

“There are around 1,300 companies on BSE with free float market cap under Rs 10 crore and about 100 on NSE. So, trades in these 1,400 companies may come under GSM. And around 10 companies have been suspended by the Ministry of Corporate Affairs,” the source added.

Besides, another person aware of the developments said: “There are less than 100 unique PANs that have traded in scrips of the 1,000 companies. About 650 companies have a price to equity ratio less than zero.”

The market regulator and the taxman have in the past came down strongly on penny stocks. The Income Tax Department is cracking down on entities that have used capital market for tax evasion via long-term capital gains tax. The SEBI is tightening norms for listing and continuous listing.