SEBI to crack a whip on people misusing SME platform to evade tax

In a bid to book people misusing SME (Small and Medium Enterprises) trading platform of exchanges to show money as legit trading income, the Securities and Exchange Board of India (SEBI) is investing a string of trades.

SEBI is speculating that the string of trades in stocks of SME and derivatives like currency options are carried out to launder money and escape tax.

Not only this, people, on the other side of the deals, do reverse by converting a slice of their official income into black money to book fake expense or loss that would lower earnings and tax.

Two people familiar of the investigation told Economic Times that SEBI’s probe was at an advanced stage.

Traders told ET, "It begins with the registration of a company or preparing an existing firm for listing. Say, the stock is placed at a valuation of Rs 25 a share to a person who is looking for a way to convert black money into white. He actually pays Rs 500 a share - Rs 25 officially in cheque and Rs 475 as cash. The stock is then valued at Rs 25. All this happens at the prelisting stage. Then the company is listed at a price of Rs 25 and the stock is driven up through circular trading among promoters or within a closed group to Rs 500 or even higher. The man who bought the shares at Rs 25 when the firm was unlisted now sells the shares at Rs 500 knowing well that the stock is not even worth a fraction. He receives Rs 500 as official trading income - which net of 'service charge' is the amount he had given as cash to the company's promoter prior to listing. Thus, the black money returns as white."

The financial daily reported the other side of the story as well where the buyer, fully aware of the underlying deal, comes in with a different plan and motive. He does exactly the opposite of what the seller of the stock does.

A former exchange official told ET that the game in currency options was simpler and smarter.

"There is no need to incorporate a company, apply for listing and open demat accounts. Also, transaction cost is lower. Multiple trades in out-of-money options help an option buyer to convert black (money) into white. The conversion does not happen in one or two deals. The call option buyer goes on buying and selling, booking small profits every time. The deal is spread over a series of transactions so as not to attract attention," the trader told ET.

(Image: Indiatimes)