iBankers put on notice for listing fake SME IPOs: Sebi: Many firms got listed for tax evasion, money laundering


iBankers put on notice for listing fake SME IPOs

Sebi: Many firms got listed for tax evasion, money laundering

Ashwin J Punnen

2 July 2015

Financial Chronicle

As part of its crackdown on price manipulation on the SME trading platforms of the stock exchanges, market regulator Sebi has asked merchant bankers operating in this space to improve due diligence while bringing companies for listing. Sebi has found that many companies that exist only on paper just for the purpose of tax evasion and money laundering were brought to the market. The regulator now wants iBankers to ensure that the due diligence is done properly. Sources said Sebi was looking at the role of merchant bankers in the SME IPOs. The market regulator is also likely to review the regulation governing the SME segment, where companies can raise funds from HNIs and institutional investors with minimum disclosure requirements.

Earlier this week, Sebi had barred four companies — Eco Friendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment and HPC Biosciences — along with 235 other entities from the market for making Rs 614 crore illegal gains through suspected money laundering and tax evasion. Most of these companies have no real business, yet they managed to raise funds and got listed on the SME platform. Several companies with turnovers of less than Rs 5 crore and market capitalisations of over Rs 500 crore have seen sharp rise in stock prices without any change in fundamentals.A sharp rise in traded volumes and prices of these scrips was noticed between January 1, 2013 and December 31, 2014, after which the regulator initiated a preliminary inquiry.

There was sharp price fluctuations in several stocks listed on the SME platform, with stock prices rising up to 2,500 per cent in some cases and dropping up to 6,000 per cent in some others.

It is suspected that the players have used these counters to book losses to evade tax.

The Sebi order said “..prima facie find that the preferential allottees, pre-IPO transferees acting in concert with funding group and trading group have used the stock exchange system to artificially increase volumes and prices of these scrips to make illegal gains and convert ill-gotten gains into genuine ones.”

The acts and omissions were prima facie for generating fictitious long-term capital gains (LTCG) so as to convert unaccounted income of the preferential allottees and pre-IPO transferees into accounted one with no tax payment as LTCG is tax exempt under Section 10(38) of the income-tax act, 1961, it said.

Sebi feels merchant bankers to these issues have not done the due diligence while taking these companies to the market. Most of these firms have got listed after 2012. Last year, Sebi has unearthed similar manipulations against several companies listed on the main board.


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