Around 100 brokers under lens for helping shell companies
The Securities and Exchange Board of India (Sebi) and the tax department are investigating the role of about 100 brokerages which they believe may have helped shell companies launder as much as ₹16,000 crore by compromising so-called knowyour-customer (KYC) norms, said two people with direct knowledge of the matter.
This is part of an ongoing probe into shell companies by the ministry of corporate affairs, which has identified some 16,000 potentially bogus firms after drawing inputs from the Serious Fraud Investigation Office, Central Bureau of Investigation and Enforcement Directorate, these people said. The 331 firms that Sebi branded as suspected shell firms on 8 August were part of this list. Out of the 16,000 firms, some 10,000 were flagged by the income-tax department.
Sebi did not respond to emails seeking comment. A central board of direct taxes spokesperson did not respond to phone calls seeking comment.
The government has identified shell companies as a key target in The ministry of Corporate affairs has identified 16,000 shell firms
The inCome-tax department has flagged 10,000 of these firms
SuCh shell Companies are being used as a Conduit for laundering blaCk money
The brokers helped these bogus Companies aCCess the stoCk market by Compromising KYC norms
its campaign against black money and 162,000 firms have been deregistered, finance minister Arun Jaitley said on July 21.
Shell firms are ones that do not have any legitimate business and are used only for tax evasion and money laundering.
The brokerages played a key role in allowing these shell firms to trade in listed penny stocks and show illegal wealth as trading profits, one of the two people said.
“Some Kolkata-based brokers have themselves created front companies. In some cases, entry operators (middle men who facili- tate deals) have been allowed to open bogus companies and client accounts with brokers. For allowing shell companies to trade, the brokers take a cash commission,” added this person.
While this is an initial alert list, the regulators are approaching it with caution.
“Not all brokerages in the list are operating out of malafide intent. In some cases, it is officials in regional offices who have circumvented the law by compromising KYC norms and failure to do proper due diligence on clients. So, it could be lack of systems,” said the second person.
Sebi’s caution also arises from the fact that the capital markets regulator’s August 8 order had to partially reversed after some of the banned companies approached the Securities Appellate Tribunal (SAT) for relief. SAT allowed eight of these companies—Parsvnath Developers Ltd, Kavit Industries Ltd, Kkalpana Industries (India) Ltd, SQS India BFSI Ltd, Pincon Spirit Ltd, Signet Industries ltd, J. Kumar Infraprojects Ltd and Prakash Industries Ltd—to resume trading. The regulator has asked exchanges to verify credentials of over 100 out of the 331 firms.