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The FinMin letter of 2007

N Sundaresha Subramanian  |  New Delhi 

Skeletons are tumbling out of many cupboards, going by media reports on details of a finance ministry letter to market regulator Securities and Exchange Board of India (Sebi) on the Financial Technologies group.

Street Food reviewed this controversial, explosive letter dated October 2007, marked "confidential". It encloses three documents received from the Central Board of Direct Taxes (CBDT). These include "a self-contained note on search and seizure operations" in the commodity market group of cases. Second, it contained a letter from director general of income tax (investigations) on the admissions made by the group. Third, a statement by Jignesh Prakash Shah recorded under section 132 (4) of the IT Act on June 20, 2007.

The "search and seizure" was conducted on Financial Technologies (FTIL), Multicommodity Exchange (MCX) and Jignesh Shah and others on June 19, 2007. The note from DGIT gives some interesting details about other entities trading on MCX and scrutinised as part of this operation. Discrepancies totaling Rs 105 crore were found in the form of "false claim of depreciation, unproven deposits in client margin account, unaccounted brokerage income, unexplained cash and jewellery. "

Investigators found one broking entity had accepted cash deposits of Rs 40 crore from 856 people across the country. This broker was not able to establish beyond doubt, the "identity and creditworthiness of the creditors." This entity is connected to a Dubai-based NRI businessman, whose links and activities were under multi-agency scanner at that time.

The other interesting entity named was involved in the Kochi IPL fiasco. In the course of post-search investigation, this group admitted "undisclosed income of Rs 16 crore on account of losses purchased at MCX."


MCX and Shah did not admit to any undisclosed income. But, cash of about Rs 1 crore each was seized from FTIL and one of its directors. FTIL said it was withdrawing a claim of Rs 18 crore depreciation on Intellectual Property Rights charged to the books. Shah, is quoted saying that "in order to avoid litigation and buy peace and to cooperate with the department, I would like to withdraw the excess claim."

The October letter from the finance ministry said, "though the above documents do not provide final findings, these provide adequate basis to conclude, prima facie, that Financial Technologies, MCX and Jignesh Shah are not fit and proper to acquire shares in stock exchanges."

It added, "Sebi is advised to defer any proposal to acquire shares in stock exchanges by these entities until CBDT issues a show cause notice to them or clears them of any tax liability."

What happened after this? There was apparently an update from the finance ministry in June 2008. What was this update? A recent Business Standard report (http://bit.ly/1eDFY4R) provides some clue. It said the group had challenged the tax department at the commissioner's level and won. "After the department went to the Income-Tax Appellate Tribunal, Shah's lawyers and officers were convinced that MCX had a watertight case, but Shah put his foot down and decided to pay up the money."

Was the tax liability thus cleared? Did the finance ministry update to Sebi confirm this? If so, did these nullify the earlier conditional advice which comes with the word 'until'?

First Published: Mon, October 21 2013. 22:43 IST
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