Black money hunt reaches penny stocks: I-T dept unearths nexus between shell cos, operators

In the aftermath of the scrapping of high-value currency notes of Rs 500 and Rs 1,000 notes in early November, the government had made it amply clear that it will root out black money from the system. Not just people holding huge amount of unaccounted cash in their possession, the government has also said that its spectre of investigation will also include the mushrooming shell companies and listed penny stocks on the bourses.

With its motive to untangle the nexus between stock brokers, shell companies and penny stocks, the income tax department on 28 February filed a criminal prosecution case against one Mukesh Ruia, the promoter of the listed Shekhawati Poly-Yarn, in a money laundering case, a report in The Indian Express.

In Mumbai city alone, the income tax department has claimed to have filed criminal prosecution charges against shell companies, stock brokers, operators involved in laundering of over Rs 10,000 crore, the report said.



These dormant companies, stock brokers and operators in connivance manipulated the listed penny stocks and later availed tax exemption by showing bogus long-term capital gains, the IE report said.

Penny stocks listed on the bourses are traded at a relative low price, often in single digits with extremely lower market capitalisation. Generally, brokerages and experts never recommend such stocks as most of them are prone to manipulation, mainly between operators and promoters.

In the case of Mukesh Ruia, against whom the I-T department has filed criminal charges, the promoter was helped by a Kolkata-based brokerage firm, Intellect Stock Broking Pvt Ltd, in buying 41.71 lakh shares of Unno Industries in 2011 at Rs 1.79 per share through preferential allotment.

In the next two years, the owner of brokerage firm and some shell companies from Kolkata namely Nimbus Vincom Pvt Ltd, Viewlink Dealer Pvt Ltd, Vedant Commodeal Pvt Ltd and Touchwin Dealcomm jacked up the share prices of Unno Industries through circular trading.

Following the rigging of share prices, the Unno Industries shares reached Rs 38 a piece in 2013, helping Ruia's stake getting valued at Rs 17 crore. Later, Ruia infused money into these dormant companies, allegedly routing black money into these firms. Subsequently, these shell firms bought Ruia's stake in Unno Industries, which helped the latter to claim tax exemption on the profit of Rs 17 crore he made via trading in the penny stock, the IE report added.

Recently, the government had said it will shut down around 6 to 7 lakh dormant companies, many of which were engaged in high-value transaction post note ban and also deposited huge amount of cash in banks.

"There are about 15 lakh registered companies in India and only 6 lakh companies file their annual return. This means a large number of these companies may be indulging in financial irregularities," a statement from PMO said last month.

It was decided at the meeting in February that appropriate "red flag" indicators will be used for identifying shell companies, and a database of such companies and their directors will be built by pulling in information from various agencies.

Penny stocks table - March 6 2017 (002)

The government also said that it would take 'harsh punitive' action on domestic shell companies, besides freezing their bank accounts used to launder money or evade taxes.

However, most of the penny stocks continue to witness relentless activity, but stock exchanges continue to monitor the movement in these small stocks. These small or penny stocks often come under the scanner of the stock market regulator and stock exchanges for their sudden spike in share prices which are mostly not in sync with the company fundamentals.

Following the sharp upsurge in broad market sentiment in last two months of the current year, several penny stocks witnessed steep upward movement, resulting in bourses taking a close look at their movement in such a small time.

As many as 774 small stocks were put under a graded surveillance measures framework by stocks exchanges in the wake of a sharp upsurge in these prices, The Economic Times report said. (The table given above has a list of penny stocks that saw huge surge in share prices. It doesn't indicate these stocks are under scanner.)

The exchanges will start taking action on the shortlisted companies from 14 March.

"According to exchanges, stocks whose prices rise abnormally without earnings, book value, fixed assets, net worth or price-to-earnings multiple justifying the movement will be subject to heightened scrutiny." the ET report added.

Some of the penny stocks witnessed irrational exuberance over the past one year. Stocks like Moschip Seminconductor zoomed 587 percent, Shiva Cement vaulted 268 percent, KM Sugar Mills flared up 218 percent and Manaksia Industries shot up 172 percent, respectively.

Data input by Kishor Kadam

Updated Date: Mar 06, 2017 13:53 PM

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