Mumbai: India’s capital market regulator has approached the investigation wing of the income-tax (I-T) department in Mumbai to probe two critical cases related to stock manipulation.
One of the cases involves Ketan Parekh, the share broker and main accused in India’s biggest stock market scam dating back to 2000-2001, and the other, an alleged securities fraud by the promoters of cinema operator Pyramid Saimira Theatre Ltd.
In a 17 September letter to the director general of I-T investigation in Mumbai, the Securities and Exchange Board of India (Sebi) asked for bank account details of 13 firms associated with Parekh, including Acme Craft Pvt. Ltd, Shanti Financial Services Pvt. Ltd and Jay Investrade Pvt. Ltd.
Under scrutiny: Stock broker Ketan Parekh. The capital market regulator has asked for bank account details of 13 companies associated with him.
In the letter, reviewed by Mint, the market watchdog also sought information on the flow of funds between these firms and Parekh, details of their loan agreements and reports of any enquiry conducted by the I-T department on these entities.
In the past there have been instances of informal sharing of information between the regulator and the I-T department, but this is the first instance of Sebi formally asking the I-T department to help with investigations related to stock markets.
The market regulator has also assigned the job of coordinating with the I-T department on these matters to one of its executives.
“This process is a part of the ongoing investigations in both the matters,” said a senior Sebi official, who did not want to be identified. The official declined to divulge details.
Parekh, a Mumbai-based stockbroker, was allegedly involved in the stock market scam of 2000-2001. He allegedly rigged share prices of firms in collusion with promoters through circular trading. Under this method, sell orders are entered by a broker who knows that offsetting buy orders for the same number of shares at the same time and at the same price have either already been or will be entered. As a result, these trades don’t represent any change in the beneficial ownership of the security.
Parekh and his associates borrowed from the erstwhile Global Trust Bank Ltd (GTB) and Madhavpura Mercantile Co-operative Bank to finance these transactions. Parekh had siphoned about Rs900 crore from Madhavpura Mercantile Bank for trading in shares and was unable to return the money, which led to the bank’s collapse. GTB was later merged with Oriental Bank of Commerce. In December 2003, Sebi banned Parekh and associated firms from trading in the market for 14 years.
Despite the ban, Parekh was trading in stocks using front entities, a June 2009 Sebi order suggested.
In the Pyramid Saimira case, Sebi has sent a list of 253 entities to the I-T department for investigation.
In the same 17 September letter, the regulator has asked for the tax payment details of these entities, and search and survey reports conducted by the department. A Sebi investigation shows that the entities have booked huge profits by trading in the markets and have not paid taxes.
In April, Sebi in an interim order, barred Pyramid Saimira promoters Nirmal N. Kotecha and P.S. Saminathan for allegedly forging a Sebi document in December 2008 that purportedly allowed the firm to make an open offer. Under takeover laws, any entity that acquires more than 15% in a firm needs to make an open offer for at least 20%.
There were media reports that Sebi had directed Saminathan to make an open offer for a 20% stake at a price not less than Rs250 per share, but the market regulator clarified that no such order or letter had been issued by Sebi to Saminathan.
The regulator conducted a probe into the matter which prima facie showed that the forgery was made to manipulate the stock price, Sebi said. Sebi also barred 228 persons and entities from trading in the markets, including initial public offerings.
Sebi prima facie found that Kotecha was one of the major beneficiaries of the manipulation and masterminded the forgery. The regulator also said he was found to be using a large number of front accounts, including those of his relatives and associates and their entities, to manipulate the market and route funds through several entities to hide the source of funds—a case of money laundering.