Mumbai: The income-tax (I-T) department in Mumbai is assessing tax evasion by a dozen firms linked to Reliance Industries Ltd (RIL) on at least Rs400 crore of profits made by trading in shares of Reliance Petroleum Ltd (RPL), in the months leading to the scrip’s record high in November 2007.
The investigations are in the final stages of completion, an I-T official familiar with the probe said, asking not to be identified.
The oil and gas explorer, India’s most valuable company, has accepted that these firms acted on its behalf, but said the entire income has been “duly accounted for”. As profits from these trades have been recorded in RIL’s books, the Mukesh Ambani-led firm would likely have to bear the tax liabilities along with interest and penalties arising out of the probe.
India’s stock market regulator Securities and Exchange Board of India (Sebi) is meanwhile conducting a separate and independent investigation into the same set of transactions for possible violations of insider trading norms.
“The department has carried out independent investigation based on data from NSE (National Stock Exchange of India Ltd) and found that 10-12 entities, which made huge profits by trading in RPL, were linked to the Reliance Group,” the I-T official said. “The department is working out the tax liability on each of these entities... The department had sent summons to all these entities and they have admitted making profits in their response.”
The official added that the department probe’s scope was to only ascertain the extent of tax evasion by these firms.
Replying to an email query by Mint, Manoj Warrier of Neucom Consulting, the official external spokesman for RIL, said: “All entities referred to in your e-mail have acted as agents of Reliance Industries Ltd. The entire sale proceeds net of commission was paid over by these entities to RIL. The resulting income accruing from the transactions has been duly accounted for in the books of RIL for the period ending 31st March 2008.”
Sandeep Shanbag, a Mumbai-based investment and tax planner, said: “Any entity that has evaded tax will have to pay an interest of 12% per annum from the time the tax is due till it is paid. It will also have to pay a penalty, which depends on the nature of violation.”
After some three months of speculative rally, the RPL stock surged to an all-time, intraday high of Rs295 on 1 November 2007. This was accompanied by a huge build-up of “open interest”—outstanding position of traders in the futures and options market—in RPL shares.
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On 6 November, the same year, NSE banned derivative trading in RPL as open interest in the stock crossed the threshold level of 95% of marketwide position. The ban was lifted in end-November.
By then, RIL had announced it had sold 180.4 million shares of RPL, representing 4.01% of the whole, for Rs4,023 crore and the outstanding positions had reduced considerably.
In 2008, Sebi started investigating allegations of insider trading related to the transactions, a process that is still on, according to statements made in Parliament by interim Union finance minister Pranab Mukherjee and his deputy P.K. Bansal recently.
RPL shares have declined by about 70% since their November 2007 high. On Thursday, RPL shares closed nearly flat at Rs83.80 on the Bombay Stock Exchange. The benchmark Sensex index, too, ended flat at 9,001.75 points.
The tax official mentioned earlier identified 10 of the firms involved: Vinamra Universal Traders Pvt. Ltd, Aarthik Commercials Pvt. Ltd, Dharti Investment and Holdings Ltd, LPG Infrastructure India Pvt. Ltd, Relpol Plastics Products Pvt. Ltd, Pipeline Infrastructure India Pvt. Ltd, Relogistics (India) Pvt. Ltd, Darshan Securities Pvt. Ltd, Fine Tech Commercials Pvt. Ltd and Gujarat Petcoke and Petroproducts Supply Pvt. Ltd.
The department had asked these firms last October to produce details of the trading in RPL stock.
In one of the summons dated 6 October 2008, which Mint has reviewed, the I-T department had asked the top management of Pipeline Infrastructure to furnish details of the “names and addresses” of the brokers it dealt with “along with the client code” and “broker-wise transactions” in the futures segment of the securities market giving the time, quantum, type of transaction (buy/sell) and the tax paid by the firm that year. The department had also asked the firm to submit details on the “source of margin money payments” for the transactions and “total profit earned”.
Meanwhile, RIL announced earlier this month its decision to merge its 70% refining subsidiary RPL with itself, issuing 1 share of the parent company for every 16 shares held by RPL’s shareholders.
RPL’s new sophisticated 580,000 barrels per day (bpd) refinery in Jamnagar, commissioned late-December, and RIL’s 660,000bpd refinery nearby, have together become the world’s largest refining hub in a single location.
US’ Chevron Corp., which chose not to exercise its option of hiking its stake in RPL to 29% since picking up an initial 5% in April 2006, will be exiting the refinery at a time when refining margins are expected to stay subdued due to weak global demand. Shareholders of RIL and RPL are expected to approve the merger on 4 April and 9 April, respectively.