Sebi cautious on tax fiddles

Says such manipulation via stocks worth Rs 8,000 cr detected in recent past but action possible only after at least 18 months, to ensure enough evidence

Tax manipulation of an estimated Rs 8,000 crore was under the observation of the Securities and Exchange Board of India (Sebi) for nearly two years before orders were issued, the market regulator has said.

In the recent past, Sebi has barred a little over 300 entities, both individuals and listed companies, for evasion of taxes by manipulation of stocks, typically of shell companies. A query to Sebi under the Right to Information law, by the Indian Council of Investors, showed many of these entities were under a Sebi lens after its surveillance system generated alerts.

“The period involved in this type of entire manipulative operation is 18-24 months and the companies suspected of such operation were continuously under watch and examination of Sebi,” went the regulator’s reply. Sebi said its systems generate alerts in the case of substantial price movement in companies with weak financials and low market valuations.

However, despite such leads, Sebi could pass interim orders against the wrongdoers only after the said period of time, with the unfolding of the entire method, was complete. This is despite the powers conferred on it under Section 11B of the Sebi Act, to take preventive steps to safeguard investors’ and market interest.

“Orders are passed as and when alerts are generated and adequate facts are collected to establish market manipulation or any other violation under the Act,” said a Sebi spokesperson, when asked whether Sebi could have taken preventive steps in cases referred to under the RTI query.

Legal experts say the Act allows the regulator to act faster. “Under Section 11B, Sebi can issue the necessary directions to stop perpetuation of any ongoing wrong in the securities market or to restrain activities which may be detrimental to the investor interest. The directions have to be issued in a timely manner, as soon as there are reasonable grounds to believe investor interest is being compromised or securities markets are suffering. Any delay might be detrimental,” said Tejesh Chitlangi, partner, IC Legal. Adding: “The challenge for Sebi is to ensure sufficient findings to warrant such directions and these do not materially prejudice the party against whom the directions are issued.”

Sebi says caution is needed. “Any action by Sebi needs to be backed by ample evidence. Else, it won’t stand in front of the court and tribunals. The regulator’s action can also be termed vindictive by the entities if there isn’t enough evidence in support,” said a Sebi official, asking not to be named.

In a report this July, a Special Investigative Team had highlighted the issue of unaccounted money being funnelled through stock exchanges. “There is an urgent need for having effective preventive and punitive action in such matters to prevent recurrence of such instances...We believe that with effective and timely monitoring by Sebi, a significant number of such instances can be checked in time,” stated their report.