The income tax (I-T) department has detected a racket of money laundering through the secondary market, the first estimates of which show a whopping Rs 10,000 crore at stake at the national level.

Though the `penny stock’ scam has been detected among traders of Chikpet locality in the heart of Bangalore, I-T officials do not rule out the involvement of many businessmen, stock exchange dealers and small-time companies across the country.

The quantum of the fraud in Bangalore alone is pegged at Rs 2,000 crore. The detection of penny stock scam in Bangalore is the fallout of nationwide I-T raids on the premises of businessmen in April 2006 for alleged money laundering through ramping up shares of small companies or penny stocks. Around 25 premises were searched in Mumbai and 10 in Bangalore. After the raids, I-T sleuths in Bangalore speeded up the probe and took the case to its logical end.

Penny stocks are shares of companies that have low market cap, but are listed on BSE. Nearly 25 such small companies having businesses in Vadodara, Mumbai, Kanpur and Bangalore are into fake transactions with active participation of hawala operators.

The audit of one Vadodara company, which traded with Bangalore businessmen, revealed that the volume of shares traded was worth Rs 400 crore, while the company made annual profits of only Rs 2 lakh and didn’t declare any dividend.

The I-T sleuths of central circle, Karnataka, pursued the investigations and issued orders on December 31, 2008 that are said to have national ramifications. On April 28, the Central Board of Direct Taxes billed the case as the best assessment order of the year. The sleuths picked up accounts of 30 Chikpet traders who were into penny stocks and found bogus claims through capital gains. Ramping up penny stocks to launder money is an organised crime—a serious economic offence that has misused provisions of Sebi, BSE and Registrar of Co-operatives. This route is chosen to use capital gains tax and legalise the unaccounted money.

Prior to October 2004, the capital gains tax was 10% on long-term capital gains and 30% on short-term capital gains. However, on October 1, 2004, the government revised the taxes—10% on short term and total exemption on long-term cap.

These traders use capital gains—normally the long-term cap before October 2004—to turn black money into white. While in a normal route, a flat 30% has to be paid towards I-T, in cap gains, it’s just 10%.
The finding has also debunked the claim that demat is sacrosanct—though the depository participation did not have any role in the manipulation, the demat procedure was misused.

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  1. dinesh joothawat says:

    please supply the name of the companies and brokers and chartered accountants