Black money fight: Sebi, government to update SIT on safeguards

Mumbai: Asked to tighten its noose on tax evaders and black money launderers in stock markets, regulator Sebi will consult the government on all necessary steps, including on P-Notes, and update the Supreme Court-appointed Special Investigation Team about the safeguards.

At its board meeting here Monday, the Securities and Exchange Board of India (Sebi) took stock of all the checks and balances it has put in place to check such manipulations, sources said.

The board members, which include the nominees from the government and the RBI as also independent members, were also apprised of the action initiated by Sebi against those suspected to be evading taxes and laundering black money through stock markets.

Sebi has barred over 1,000 entities so far in such cases through interim orders, while further proceedings are underway and all these matters have been referred to other agencies including Income Tax Department, Financial Intelligence Unit and the Enforcement Directorate.

While the government and Sebi are of the view that sufficient measures are in place to deal with such cases, further consultations would be held to ascertain whether additional safeguards need to be put in place. The SIT would be informed about the existing measures and additional steps, if any, in this regard, the sources added.

The board discussed the latest SIT report on black money, which among others had suggested last month that further steps might be required to check misuse of P-Notes route to launder unaccounted money from abroad.

In its latest report, the Special Investigation Team on Black Money had suggested that Sebi needs to further strengthen its monitoring mechanism to detect instances of the stock market platform being misused for tax evasion. It had also suggested Sebi to review its regulations on participatory notes to help identify the end-users of these instruments.

Finance Secretary Rajiv Mehrishi had also said last week that there was no requirement for "much change" in the regulations for Participatory Notes as the existing norms make it 'almost impossible' to misuse this route.

Sebi is also of the view that it has put in place a robust system to check any misuse of the P-Note route. P-Notes are issued by foreign portfolio investors registered with Sebi to other overseas investors who want to take a position in the Indian markets without any direct registration for trading in Indian markets.

These instruments are popular as they provide a low-cost and easier route for investing in the Indian markets.

Sebi says it has put in place strong checks and balances to avoid misuse of this route, and P-Notes can be issued only after strong KYC requirements are followed and they can not be issued to high-risk investors. The norms have been tightened considerably for P-Notes over the years.

In May, investments through P-Notes hit a seven-year high of Rs 2.85 lakh crore. It stood at Rs 2.75 lakh crore at the end of June. The offshore derivative instrument accounts for nearly 15-20 per cent of the total FII investment in India since 2009.

Its share has fallen over the years after Sebi tightened disclosure norms and other related regulations. It was as high as over 50 per cent at the peak of stock market bull run in 2007.

In the recent months, Sebi has also stepped up its crackdown on tax evasion and laundering of black money by HNIs and other domestic entities through the stock markets.

Suspecting tax evasion of over Rs 5,000-6,000 crore, Sebi has clamped down on a large number of organised syndicates who had set up 'shops' to convert black money into legitimate-looking funds through the stock market platform.

While more than 1,000 entities have been banned from capital markets, Sebi has also referred these cases to the Income Tax Department for further investigations.

Talking about the menace of money laundering and other market-related manipulations, Sebi Chairman U K Sinha recently told PTI in an interview that the regulator is trying to curb such cases one-by-one very successfully.

"As far as markets are concerned, one by one we are trying to curb the manipulation very successfully, be it IPO markets, GDR markets or secondary markets. But I must also say that this is an ongoing battle and I cannot say that we have controlled every thing," he said.

Giving a "complete picture" on this menace, the Sebi chief said, "In any country or in any market, there are always people who are trying to find loopholes and take advantage.

"These are the people who have criminal intent. They are not here to help in the growth of the country. They work with a desire to corner money with criminal intentions."

Last week itself, Sebi busted an 'innovative' scheme wherein HNIs were incurring 'bogus losses' worth hundreds of crores of rupees to offset tax liabilities.

Under its stepped-up surveillance mechanism, the Securities and Exchange board of India (Sebi) has come across several instances and internal alerts wherein a set of entities were consistently making loss by their trading in options on individual stocks.

Trading of these entities appeared abnormal because they were consistently seen making significant loss by their trades, which were reversed with the same counter parties either on the same day or the next day.