A Supreme Court-appointed special investigation team (SIT) on unaccounted money has come down heavily on the creation of such funds through stock exchanges and participatory notes (P-notes). In a report, the SIT said the Securities and Exchange Board of India (Sebi) should have an effective monitoring mechanism to study unusual rises in stock prices and the use of stock exchanges to evade taxes through long-term capital gains.
Sebi has also been asked to put in place a mechanism to monitor the beneficial owners of P-notes.The SIT has recognised the recent steps taken by the regulator to scrutinise cases of tax evasion through exchanges.
Sebi has been sharing such information with the income tax department. Now, the SIT has directed it to share that with the Financial Intelligence Unit, too.
The investigation into market manipulations shows the modus operandi involves companies with poor financial fundamentals raising huge capital by allotment of preferential shares to various entities. This is followed by a sharp rise in share prices, once preferential allotment is carried out, through circular trading. The artificially inflated stocks are then offloaded through companies funded by those seeking to convert unaccounted money into ‘white’ money.
Recently, Sebi had barred about 250 entities, both individuals and companies; the overall funds involved in this could be Rs 20,000 crore.
The SIT, however, isn’t satisfied with a ban on such entities, advocating these entities be prosecuted under the Sebi Act. “The Enforcement Directorate should be informed to take action under the Prevention of Money Laundering Act for the predicate offences”.
Though Sebi is considered to be heading a multi-agency probe on black money creation in domestic markets, the regulator has been criticised for not intervening in these cases on time.
The SIT advised Sebi to red-flag instances pertaining to trading volumes, entities contributing to trading volume and financial backgrounds of firms through annual returns.
According to SIT, information with Sebi on ‘beneficial owners’ should be on individuals. “In no case should the information end with name of a company,” it said. The regulator has been tasked with keeping information on promoters or directors who exercise effective control over the company holding these derivative instruments.
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