Sebi writes to Fin-Min on money laundering probe

Companies suspected might face trade suspension

The Securities and Exchange Board of India (Sebi) has sought help from various investigative agencies under the finance ministry on alleged money laundering in listed companies. Sources said the markets regulator had written to the finance ministry recently, highlighting the method used by certain low-value companies to evade taxes. “The regulator has sought the help of the enforcement directorate, financial intelligence unit, and the income tax department, to expedite investigation in the listed companies' tax evasion,” said a source.

Sebi also plans to suspend the trading in the companies that are suspected of market manipulation and tax evasion through the exchange platform. It is currently examining about 100 listed companies. The quantum of the alleged scam is pegged at Rs 20,000 crore. The modus operandi is believed to be similar to the one seen in the cases of Radford Global, First Financial Services and Moryo Industries. Through two interim orders, the market regulator has so far barred 360 entities from the capital markets including operators, traders, promoters and persons acting in concert.

MONEY LAUNDERERS’ MODUS OPERANDI

• Approach a key operator, find an illiquid stock
• Get preferential allotment of shares done
• During lock-in period, a syndicate increases scrip price to a predetermined multiple of allotment price
• After lock-in ends, another syndicate buys shares from original allottee through market transactions at a higher price
• Purchase of shares is funded by original allottees through multiple layers, enabling circulation of unaccounted-for money

According to initial investigations by Sebi, these 100 companies 'exist only on paper' and are using the exchange platform to convert 'black money into white'. These firms, thanks to the clause of a compulsory one-year lock-in on shares issued through the preferential route, were eligible for long-term capital gains (LTCG) on the sale of these shares.

“Probe is underway to verify whether these companies and related entities carried out trading among themselves to manipulate share prices, before and after preferential allotment,” said a source.

Such manipulative trades involve entities seeking LTCG exemption approaching an operator, who finds out an illiquid stock on the exchange platform and gets a preferential allotment of shares done to the entities. During the lock-in period of one year, another syndicate increases the scrip price to a pre-determined multiple of original allotment price. As there is very limited demand for shares of this kind of scrips, the scrip price goes up from circuit filter to another circuit filter. After the lock-in, at the substantially higher price another syndicate buys the shares from original preferential allottees through series of market transactions.

The regulator suspects such purchases of shares are funded by original allottees through multiple layering, thus enabling circulation of unaccounted money without paying tax.