Mumbai: In a fresh crackdown on alleged tax evasion through stock markets, regulator SEBI Tuesday banned a high networth individual B P Jhunjhunwala for fraudulently inflating the share price of a dormant company with a "facade" of investment worth around Rs 15.4 crore.
The fresh order follows a number of orders passed by SEBI in various other cases for suspected tax evasion through stock market platform, including against promoters of such dormant companies as well as against certain 'investors' acting in concert to evade taxes and launder black money.
The latest order involves fictitious trades in shares of First Financial Services, which along with its directors and other connected persons have already faced SEBI action for similar fraudulent activities.
In its probe, the Securities and Exchange Board of India (SEBI) found that the share price of First Financial rose by 5160 percent (53 times) in 115 trading days when the average trading volume was only 26 shares per day.
Thereafter, in the further 209 trading days, the stock traded with an average volume of 41,252 shares per day and the the average price increased by 193 percent.
"Upon preliminary examination, it was prima facie observed that First Financial and persons in charge of its affairs created a facade of preferential allotment of equity shares of around Rs 15.40 crore in order to provide fictitious Long Term Capital Gains to the preferential allottees so as to convert their unaccounted income into accounted one with no payment of taxes as LTCG is tax exempt.
"It was observed that consequent to preferential allotment of equity shares in First Financial, price of the scrip was artificially increased by certain entities and after the expiry of the compulsory lock-in period, the preferential allottees were provided exit at a high price by the entities forming part of the First Financial Group.
"In the process, the First Financial Group and the preferential allottees artificially increased the volume and manipulated the price of the scrip thereby misusing securities market system for making illegal gains and to convert ill-gotten gains into genuine one so as to claim the LTCG benefit," SEBI said.
The regulator also found that Jhunjhunwala who had acquired majority stake of 58.08 percent in First Financial and was managing the affairs of the company through its connected or related entities at the relevant time, orchestrated the scheme of preferential issue of equity shares of around Rs 15.40 crores.
"It is strange to note that a company which was dormant or suspended for 11 years with nil activity was able to garner funds near about 42 times of its share capital soon after its acquisition by Jhunjhunwala," SEBI said.
Explaining the modus-operandi, SEBI said Jhunjhunwala acquired 58.08 percent stake in First Financial from the erstwhile promoters, including management control, and plotted the scheme of preferential allotment along with directors of the company "with an end objective to enable the preferential allottees to avail the LTCG benefit".
"He is also, prima facie, found to be playing a major role in manipulating the price of the scrip during the relevant period in the manner as mentioned above leading to abnormal increase in price of the scrip that resulted into hugely profitable exit to the preferential allottees while misusing the stock exchange system," it added.
While further investigations are underway, SEBI said, it has passed an interim order barring Jhunjhunwala from the securities markets for indulging in "such fraudulent, unfair and manipulative transactions".
"Since Jhunjhunwala is one of the promoters, and shareholder in two other listed companies, I have reasonable grounds to believe that unless restrained he may carry out similar fraudulent and manipulative transactions in other scrips," SEBI's Whole-Time Member Rajeev Kumar Agarwal said.
While the order has come into force with immediate effect, SEBI said Jhunjhunwala may file his objections, if any, within 21 days and can also avail an opportunity of personal hearing.
