Kolkata, unsurprisingly, houses the bulk of shell companies named by Sebi
Kolkata: Lyons Range spoke in its own tongue, partly through words and partly through hand signals. Every evening, hundreds of traders would gather around the Lyons Range edifice that houses the Calcutta Stock Exchange (CSE) to privately trade in shares after market hours.
They would communicate among themselves in Lyons Range-speak, in which stocks went by fancy names—State Bank of India would be referred to as Bank, Hindustan Motors Ltd as Motor, and Tata Tea as Chai.
Amid what looked like chaotic bidding and traders frantically gesticulating if they wanted to buy or sell, there was complete order.
“Kerbside trading was a well evolved mechanism for accommodation,” recalls a former CSE official from the surveillance department, who asked not to be named.
In that market, a trader would cover naked shorting on the official platform with a partner who had the shares to deliver. Similarly, a trader short of cash would find someone to take over his liability—all for a fee. The kerbside market survived open outcry trading on the floor of CSE. It died only when the bourse itself ran aground following the March 2001 payment crisis.
What kept it alive was synchronized trading—popularly known as 1-2-3. The transactions concluded in the kerbside market would be formalized on the official platform the morning after. Two brokers would connect on phone and match order placement on the official platform with a countdown: 1-2-3.
Synchronized trading is illegal under securities market regulations, but it was impossible to legally establish collusion, said the CSE official cited above.
For years, until trading on CSE was suspended in April 2013 for want of regulatory clearances, the bourse became the hub for synchronized trading, albeit with a different purpose—“tax avoidance”.
Traders would transact in shares of illiquid “shell” companies in the same manner to manage tax liabilities on capital gains. “Short-term capital gains, for instance, can only be set off against short-term losses. To minimize tax liabilities on short-term speculative gains, traders would buy losses,” said the CSE official, adding that the final settlement would always be in cash outside the official platform, and that the “accommodating partner” would charge a fee.
Not surprisingly, around 145 of the 331 companies declared shell by the securities market regulator on Monday are registered in Kolkata.
Many among them are so called jama-kharchi companies, or ones used to launder money and adjust tax liabilities, according to a key income tax department official, who too asked not to be identified.
A “serious investigation” into these companies was launched at the end of 2014 based on inputs from the Financial Intelligence Unit of the union ministry of finance, according to the income tax officer.
At least 16,000 companies registered in Kolkata were initially identified as ones without any real business, which were being used to launder money and rationalize tax liabilities, he said.
It was found that almost all these firms were compliant with listing and other norms. So, exchanges could not halt trading in their shares, said both the CSE and tax officials.
These companies would typically have a bunch of shareholders—a closely-knit community normally controlled by a “single operator”, and each operator, in turn, would run several such shell companies, said the tax official cited above. The operators hid behind “name-lenders”, or proxies appointed as directors.
In many cases, they were found to be people in distress, who would “sell their signature” for small sums of money.
Once an investigation led to an old lady in a slum, who sat on the boards of several companies as director, said the tax official. She confessed to agreeing to sign on documents for a monthly fee of Rs10,000, which she needed to support her husband’s cancer treatment.
Kolkata has historically been the “Mecca of parallel banking”, or informal trade financing, said a leading lawyer who, too, asked not to be named. Trade financing deals are routed through Kolkata because of the “efficient ecosystem” that the city has developed, according to the lawyer. And because it is well evolved, the transaction costs, too, are most competitive, he added.
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