The Comptroller and Auditor General of India (CAG) has written to the Securities and Exchange Board of India (Sebi) seeking an explanation on the loss incurred by the exchequer from misuse of the long-term capital gains (LTCG) exemption.
According to sources, the market regulator has identified loss worth Rs 150 billion due to price manipulation on the stock market platform to avail the LTCG benefit. So far, Sebi has passed nine interim orders in the matter.
Besides, the CAG has sought details of the manipulators.
Currently, LTCG is exempt from taxes. The Union Budget 2018-19 proposed to levy a 10 per cent tax on such gains, starting April 1. The regulators have come across several cases were shares of penny stocks and shell companies were jacked up to convert black money into white by showing LTCG.
“The audit authority wants to know the size of the preferential allotment and whether it would be equal to the size of the LTCG violation, especially when the allottee sold the shares,” said a person in the know.
In the last one year, the regulator has examined over 14,000 persons but could not establish the trail of fund movement. It was yet to gather sufficient evidence and references to conclude the cases, sources said.
Even the information provided by the tax authorities was not sufficient to establish connections among the promoters of these companies, the beneficiaries and the ‘last traded price’ providers and ‘exit’ providers, said the person cited above.
In January 2017, the regulator had informed the income tax (I-T) department that there was not enough evidence to establish charges against the manipulators. Sebi, in one of its board information memorandums in 2017, had pointed out practical problems in dealing with these cases.
“Enforcement proceedings against such a large number of entities will involve issuing a show-cause notice, inspection of documents, personal hearing and passing of orders.
This is when preliminary examination of cases revealed that collusion among the entities was weak or absent, since most of the transactions were settled in cash. Thus, a further probe based on weak evidence will clog the system and could also result in a futile exercise,” it had said.
Official data suggests the I-T department had referred 361 scrips to Sebi for investigating the LTCG manipulation. Of these, Sebi had identified 144 scrips for investigation and concluded investigation in 94 cases during that time. Accordingly, it had barred 1,500 people from trading in the securities market.
Further investigations revealed that over 14,000 people were involved in price manipulation to avail the tax exemption. These were apart from the 64,000 entities identified by the taxman as having evaded taxes worth Rs 380 billion.
The regulator is examining if the price of shares was manipulated, since it could proceed under Section 11B of the Sebi Act. This allows it to impound or retain the sale proceeds of the company or entity in question. Sebi is of view that it is bound to check only for market manipulation and not the tax evasion angle in these cases.