Amidst a massive crackdown on black money and tax evasion, market regulator Sebi on January 14 will take up the misuse of Long Term Capital Gains (LTCG) and stock price manipulation at its first board meeting since Prime Minister Narendra Modi announced demonetisation on November 8.
Sources say that the Sebi board will be apprised on the course of action taken on this issue, and that nearly 32,000 entities are under the scanner of both Sebi and the tax department for rampant misuse of long term capital gains and short term capital loss to evade taxes.
The market regulator is believed to have decided to enforce Section 11B of the Sebi Act in cases of stock price manipulation against listed companies, their whole time directors and other entities involved in such trades. Section 11B empowers Sebi to pass directions to any entity or person to protect the interest of the securities market, and that includes issuing of bans, disgorgement and the attachment of sale proceeds.
The tax department has flagged off two methods being deployed by beneficiaries of bogus long term capital gains. Such beneficiaries approach an operator that controls either directly or indirectly a listed company, which is typically inactive or a penny stock. The listed company allots shares on a preferential basis at nominal rates to the beneficiaries. The shares locked-in for a one year, which incidentally is also the time frame to claim long term capital gains.
The tax department has observed the capital base of these lised companies is also increased several times times over via stock splits, bonus issues, and claims the front entities of the operators manipulate the scrip price using different tactics to a pre-determined level.
“The benefeciaries allegedly give cash to the operators through several layers, equivalent to the bogus long term capital gains that needs to be generated. This is for providing exit to the beneficiaries at a pre-determined inflated price. This si how beneficiaries generate bogus long term capital gains in their book.”
The same modus operandi is used to amlagamate an unlisted company with an inactive penny stock.
Sebi’s Legal Challenge
References forwarded by the tax department to Sebi contains statements of several operators, stock brokers on the alleged collusion in various scrips to generate the bogus long term capital gains.
However, Sebi has so far not received any other independent, documented evidence and sources say the market regulator is not convinced testimonies alone will stand the test of legal scrutiny. Cash settlement between the operators and beneficiaries has also compounded the problem.