BSE pitches for long-term capital gains tax to check manipulation
17 July 2015
Business Line (The Hindu)
The BSE has written to the Ministry of Finance suggesting that long-term capital gains on stocks must be taxed to avoid the stock markets being used as a tax avoidance route. In June, capital markets regulator SEBI had barred 239 individuals and entities from accessing the securities market for using the BSE’s SME platform to launder money and avoid taxes. The regulator came down on four companies listed on the SME platform — Esteem Bio Organic Food Processing, Eco Friendly Food Processing Park, Channel Nine Entertainment and HPC Biosciences — when it noticed a sharp rise in the stocks’ prices even as the companies’ profits and earnings per share declined. Between January 1, 2013, and December 31, 2014, the share prices of Eco shot up by a whopping 6,265 per cent, Esteem by 3,150 per cent, CNE by 2,882 per cent, and HPC by 1,782 per cent.
Making use of norm
According to SEBI’s order, the companies made preferential allotment to certain entities to raise funds, sometimes to benami entities close to the promoters of the companies, and the stock prices were manipulated. Since capital gains from stocks held for over 12 months are not taxable, once the one-year period was over, these entities sold their stocks at higher prices.In its letter to the Ministry, the BSE said the reason for such an event to have occurred was because of the tax arbitrage made possible by the exemption from long-term capital gains enjoyed by listed securities. Speaking to journalists at an event marking the listing of the 100th company on the BSE’s SME platform, Ashish Chauhan, MD and CEO of the bourse, said such manipulative trades can never be identified by an exchange in real-time. “We can only identify them post-facto. So, this problem can only be solved by plugging the tax loophole on long-term capital gains on listed securities.”
End long-term capital gains tax breaks: BSE
17 July 2015
New Delhi, July 17 — BSE Ltd has suggested to the finance ministry that benefits related to long-term capital gains (LTCG) tax should be removed to curb market manipulation via the stock exchange platform.
In a letter to Manoj Joshi, joint secretary, ministry of finance, the exchange has said that some entities use the preferential allotment route on the exchange platform to benefit from the current tax regulations. Mint has reviewed a copy of the letter.
As per the current tax norms, an individual is not required to pay any tax on gains from equities if the shares are held for a period of more than a year. The tax is intended to encourage long-term investments rather than short-term trading in the capital market.
In its letter, the exchange has highlighted recent actions taken by Securities and Exchange Board of India (Sebi), barring certain companies and individuals from using the stock exchange platform for making illicit gains through LTCG tax benefits.
According to BSE, the modus operandi involves making a preferential allotment to a set of known entities. Such shares are locked-in for a period of one year if allotted to non-promoters. During the period of lock-in, the share prices of the companies are pushed up on low volumes.
“Upon the securities being free of lock-in, entities sell of the same through the stock exchanges by paying the small amount of securities transaction tax (STT) and get the full benefit of exemption from LTCG tax,” says the letter written on 8 July.
BSE has suggested to the government that the differential tax treatment for listed and unlisted shares should be removed if this route has to be plugged. Unlisted entities do not enjoy LTCG tax benefits.
“… the current differential capital gains treatment between listed and unlisted securities should be harmonized to prevent any tax arbitrage,” it says.
On 30 June, the capital market regulator barred 239 entities, including four companies listed on the small and medium enterprises (SME) platform of BSE, from accessing the securities market till further directions, citing market manipulation activities.
According to the Sebi investigations, after the shares of these companies got listed on the SME platform, some of the entities “manipulated the price/volume of the scrips and then provided profitable exit to preferential allottees and pre-IPO transferees”.
“I 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 volume and price of the scrip for making illegal gains and to convert ill-gotten gains into genuine ones,” says the order was passed by Sebi whole-time member Rajeev Kumar Agarwal.
The acts and omissions were aimed at generating fictitious LTCG to convert unaccounted income of preferential allottees and pre-initial public offering (IPO) transferees into accounted one with no payment of taxes as LTCG is tax exempt under section 10(38) of Income Tax Act, 1961, it added.
In the past, companies listed on the main board of exchanges have also faced similar investigations. In February, Sebi barred 30 entities from the market after a probe showed that Kamalakshi Finance Corp. Ltd was allegedly misusing the stock exchange mechanism to maximize long-term capital gains.
However, Deven Choksey, managing director at KR Choksey Securities Ltd, said that the LTCG tax benefit should not be abolished as it is an effective way to attract more investors to the capital market.
“As such, only a small percentage of Indians invest in capital market. Just because a small set of entities have misused the system that does not mean the entire market should be disturbed. There will always be loopholes in the system but it should be plugged in a reasonable manner,” said Choksey.
BSE chief executive Ashishkumar Chauhan said that the misuse is not due to laxity of the exchanges. “In reality it is a case of regulatory arbitrage. The surveillance systems of exchanges have improved but it is still happening. The alternate is to tax such profits,” he said while addressing the media on the sidelines of an event to highlight 100 companies getting listed on its SME platform.
On Thursday, five companies were listed on the BSE segment that was launched in March 2012. The National Stock Exchange of India, which also has a similar SME platform, has a total of six companies listed on its segment.
BSE writes to finance ministry asking it to change capital gains tax policy to curb manipulation
17 July 2015
The Economic Times
MUMBAI: To prevent market abuse, the BSE has written to the finance ministry to curb tax arbitrage between listed and unlisted securities. Currently, the long term capital gains tax on listed companies is nil if the investment is held for more than a year. The same for unlisted companies is 20% if the investment in companies is sold before three years.
“Companies use exchange platform to take advantage of nil long term capital gains tax, which should be curbed by harmonising the capital gains tax between listed and unlisted companies,” BSE said in a letter to the finance ministry.
In December 2014, the capital market regulator Securities and Exchange Board of India (Sebi) had banned 260 entities and two listed companies First Financial Services and Radford Global for their role in generating fictitious long-term capital gains to evade tax. In February 2015, Sebi suspended trading in Kamalakshi Finance Corp and imposed trading restrictions on 33 entities for making undue gains of over Rs 1,800 crore. In May this year, the Sebi banned a company Pine Animation and 77 companies for alleged evasion of tax.
As per Sebi, the mods-operandi used by companies is to make prefrential allotment to known entities. These shares are locked-in for a year if allotted to promoters and for three years if allotted to non promoters and often allotments are also made to ‘benami’ entities who are closely linked to promoters but are not classified as such. The stock prices moves upward in the next one year and then these preferential shares are later dumped in the market. This way those getting preferential allotment avoid paying capital gains tax.
The short term capital gains tax for listed entities is 15% while that for unlisted entities go up to 33%.