Penny stock scam: Sebi to act only in cases of price rigging
Sebi has so far barred about 1,500 entities who manipulated the stock prices of 12 listed companies
The Securities and Exchange Board of India (Sebi) will act only on those cases of tax evasion through the penny stock route where it is able to establish price rigging, two people with direct knowledge of the matter said.
Sebi has so far barred about 1,500 entities who manipulated the stock prices of 12 listed companies. The penny stock scam refers to promoters and market operators using the stock exchange platform to evade taxes and launder black money.
The income tax department has identified about 64,000 entities who had evaded taxes to the tune of Rs38,000 crore in an investigation report which was passed on to Sebi in 2015.
Sebi has so far investigated about half these entities and trading related to 60 BSE-listed companies. Despite passing interim orders, the regulator’s investigation department has come around to the view that regulatory action against these entities would be unsustainable.
“Sebi is primarily concerned with violation of securities law. As seen from the references made by DIT (directorate of income tax) and examination carried out by Sebi, it is observed that these cases are mainly resulting in evasion of tax which does not come under the purview of Sebi," said a board agenda note of the regulator.
Mint has reviewed a copy of this note.
Thus, Sebi would pass orders only in cases where it observes any price manipulation by these entities, said one of the two people cited earlier.
“Legally speaking any action by Sebi on tax evasion would be unsustainable till price manipulation is established. So far as the previous cases are concerned we would have to go into the merit of individual cases to see if there was any price manipulation," said Sandeep Parekh, a former Sebi executive director.
Many entities have appealed against the Sebi orders in the Securities Appellate Tribunal (SAT), highlighting that they had failed to establish any price manipulation.
“In none of the(se) cases SAT has taken a final decision. If a new policy view is taken when there is various pending litigation, the implications are varied. The same yardstick should apply to the pending cases as is proposed to be applied to future cases," said Vaneesa Agrawal, partner at Suvan Law Advisors.
The board note also added that the Sebi Act does not allow Sebi to impound gains made in lieu of tax evasion. Under section 11 of the Sebi Act, the regulator can pass so-called disgorgement orders only if an entity makes illegal gains in the stock market. It added that Sebi would refer to the income tax department cases where it is unable to establish price rigging.
“These are stock market related matters and the Special Investigation Team (SIT) had instructed Sebi to act on these cases. These matters are under strong consideration and we will ensure that action is taken in these matters," said a senior income tax official.
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