Sebi bars 246 entities in tax evasion case

In a major clampdown on tax evasion through stock markets, regulator Sebi today barred 246 entities from capital markets after they were found to have indulged in a web of “make-believe” trades to artificially inflate share prices and entrap gullible investors.

The regulator said that these entities booked a profit of Rs 1,600 crore through these fraudulent trades.

The entities were found to be operating through various companies linked to Kailash Auto group, which was later found to be almost non-existent with no operation taking place at its registered offices and facilities.

Upon investigation, Sebi found the said company to be working out of a rented “small table space” in the office of a chartered accountant firm with just one office boy as its employee to collect posts and other documents.

BSE conducted inspection at corporate office of Kailash Auto in Mumbai and reported that the claimed office was locked and no company officials were available at the time of visit of BSE officials.

It was found that the management and control of Kailash Auto was acquired by Careful Projects Advisory Ltd (CPAL) and Panchshul Marketing Ltd (PML) from the erstwhile promoter of the firm through a share purchase agreement.

Consequently, the board of directors of Kailash Auto had approved CPAL and PML as promoters of the company, Seni said.

In November 2012, the board of directors of Kailash Auto agreed for reduction of share capital of the firm and merger of CPAL and PML with Kailash Auto.

Sebi said that the merger and the reduction of the share capital was also approved by the Bombay High Court and Allahabad High Court.

During the 2011-12 fiscal, CPAL had increased its authorised share capital and then its shares were split. In the same fiscal, CPAL had issued bonus shares and further allotted shares in private placement, among others.

Thereafter, during the same financial year, CPAL had issued bonus shares in the ratio of 55 shares for 1 share and further issued 95,200,000 equity shares of Re 1 each through private placement.

On the same lines, PML had made private placement of 3,36,900 equity shares of face value Rs 10 each at a premium of Rs 690 each during 2010-11 to 15 entities and purportedly raised a share premium of Rs 23.24 crore within short time of its incorporation.

The regulator in its investigation found that the primary allottees of CPAL and PML are connected to each other on the basis common addresses and/or common directors.

“Considering the operating performance and net profit of CPAL and PML in the year of incorporation 2010-11 and financial year 2011-12, it was noted that despite having weak operating results during the said financial years, CPAL and PML had issued bonus shares in an unrealistic and disproportionate ratio,” Sebi said.

It added, “From the bank statement of the aforesaid primary allottees of CPAL and PML for the period of December 2010 to June 2011 it was observed that same funds were being churned among CPAL, PML and their respective primary allottees.
Further, the regulator said that from the annual report of

2010-11 of CPAL and PML it was observed that these companies, in concert with their primary allottees, had developed a mechanism by virtue of which the companies and their primary allottees made book entries of purported investment in each others’ equity shares.

“Accordingly, there was no infusion of cash in respect of private placements by CPAL and PML but it resulted in generation of fictitious share premium value in the books of accounts of CPAL and PML,” Sebi said.

The issue of bonus shares by CPAL and PML resulted in significant increase in the paid up share capital of these firms, the regulator said.

Sebi also noted that just after change in the promoter group of Kailash Auto to PML and CPAL, within a short span of time, the price of the scrip of Kailash Auto increased significantly.

“The above findings indicate that CPAL and PML were incorporated with a dubious plan and premeditated arrangement and artifice to increase number of shares therein through sham and non-genuine transactions with regard to issuance of their shares which resulted in fetching exorbitant and unrealistic consideration in the scheme of amalgamation,” Sebi said.

It said that these 246 entities, many of which have common addresses, common directors and even common phone numbers, were

misusing stock exchange mechanism to generate bogus LTCG (Long Term Capital Gains).

Barring the entities, Sebi Whole Time Member Rajeev Kumar Aggarwal said, “I am of the opinion that a detailed investigation of the entire scheme, plan, device and artifice employed by concerned entities and to find out the ultimate owners of funds used for facilitating the entire scheme, plan, device and artifice is necessary.”

He added, “While Sebi would investigate into the probable violations of the securities laws, the matter may also be referred to other law enforcement agencies such as Income Tax Department, Enforcement Directorate and Financial Intelligence Unit for necessary action at their end as may be deemed appropriate by them.”

When all the facts and circumstances of this case are considered holistically they prima facie emerge as ingredients in a fraudulent, deceptive and manipulative device, plan and artifice designed to tamper with free market forces and to damage the integrity of the securities markets, he said.

Apart from market manipulation in the scrip of Kailash Auto, the entire plan, device and artifice of private placement, among others were designed and structured to beguile the same as transactions with commercial sense to generate bogus LTCG which is exempt from tax, Sebi said.