Sebi continues flip-flop on penny stocks tax cases

Markets regulator Sebi is torn between acting against the tax evaders and letting the income-tax department deal with the suspected offenders


In a 3 March affidavit filed at the Securities Appellate Tribunal, Sebi has stated that there is no immediate relief for 1,500 entities against whom it has initiated action. Photo: Aniruddha Chowdhury/Mint
In a 3 March affidavit filed at the Securities Appellate Tribunal, Sebi has stated that there is no immediate relief for 1,500 entities against whom it has initiated action. Photo: Aniruddha Chowdhury/Mint

The Securities and Exchange Board of India (Sebi) is vacillating in its stand on cases where penny stocks were used to evade long-term capital gains tax (LTCG). The regulator is torn between acting against the tax evaders and letting the income-tax department deal with the suspected offenders.

In January, Sebi decided to act only against those entities that rigged prices. Entities that evaded taxes would be referred to the tax department, the market regulator’s board decided, based on a recommendation by its investigation department, through a so-called information memorandum. This memo was sent after all of Sebi’s departments met to discuss the issue.

Now, in a 3 March affidavit filed at the Securities Appellate Tribunal (SAT), copies of which have been reviewed by Mint, Sebi has stated that there is no immediate relief for 1,500 entities against whom it has initiated action. These include both price manipulators and tax evaders.

The regulator had to file this affidavit after most of the 1,500 entities approached SAT, appealing against Sebi’s interim orders barring them from accessing the securities markets. These 1,500 are part of the 64,000 entities identified by the income-tax department as having evaded taxes to the tune of Rs38,000 crore. The tax department’s investigation report was passed on to Sebi in 2015.

Sebi’s information memorandum was a part of the affidavit filed by the petitioners. These entities have argued that the regulator had not established that they (petitioners) were involved in price manipulation and, based on its own memorandum, Sebi’s orders should be lifted.

In its affidavit, Sebi said that the “interpretation of the memorandum is erroneous and misconceived.” It indicated that the intention was not to exonerate people or entities if evidence was found against them.

The affidavit further added that Sebi’s board will be consulted again to seek clarification on the memorandum since it is being interpreted as recommending that tax beneficiaries get away “scot free”.

“Sebi is in the process of taking necessary steps to obtain the approval of the competent authority for the clarification of the intention and object of the information memorandum,” said the affidavit. The competent authority referred to here is the Sebi board or the regulator’s chairman.

Sebi insiders say that this is a classic case of two departments having conflicting views on the same issue.

“While the investigation department is suggesting to restrict enforcement to price manipulators, surveillance department (who had passed interim orders) is holding every entity involved under suspicion,” said an official, declining to be named.

A second Sebi official said that “in these matters, where there is conflicting view and SAT is aware of the facts and the circumstances, it can decide what is the right view”.

Sebi’s official spokesperson did not respond to an email seeking comment.

Sebi’s investigation department has completed probes in 43 cases as per a January board note and is yet to pass final orders. Sebi passed at least three orders confirming earlier interim orders in these matters in January and February after the department had submitted its view.

“Any decision of the regulator cannot be taken as static and will be dynamic based on changing situation. In this case it also appears that Sebi is changing its position based on the current facts and circumstances,” said J.N. Gupta, former executive director at the markets regulator.

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