In a major crackdown on listed companies suspected to be existing 'only on paper', Sebi has initiated action against more than 25 such firms amid concerns they could have been set up to route black money or evade taxes.
During its inspections, which began pursuant to 'alerts' generated by Sebi's surveillance department, Sebi found that some of these companies were not even physically present at their registered locations, while many of them do not have identifiable promoters, sources said.
The capital markets regulator has begun summoning auditors, compliance officers and key management personnel and officers of these companies, whose names exist on the documents submitted by them to the stock exchanges and other authorities to provide further details, they added.
While the probe is currently in initial stages, it is suspected that these companies (small and medium enterprise) might have been using the stock market platform to abuse the system for income tax avoidance and other money laundering related purposes.
These companies, which are listed on the stock exchanges and have been complying with all necessary disclosure norms by submission of financial and other details in time, caught attention of Sebi after a sharp spurt in their share prices during the ongoing bull run.
While their upward stock movements were not supported by the fundamentals and financial positions of such companies, further inspections by Sebi officers showed that they were not even physically present at their disclosed locations and turned out to be largely shell entities or 'only-on-paper' companies.
In a typical modus operandi, there are certain operators in these companies' scrips who create abnormal price rise after allotment of preferential shares to certain related parties.
Thereafter, exit routes are provided at high price resulting in long-term capital gains.
The regulator, which has a very strong electronic surveillance mechanism, has been further enhancing its surveillance activities to adapt to changes required due to changes in marketplace and in light of the recent market movements.
The surveillance system throws alerts on a real time basis and they are then examined by Sebi to probe whether any attempts have been made for market manipulations.
The Securities and Exchange Board of India (Sebi) is also putting in place a comprehensive framework to deal with the listing and trading of only-on-paper companies and tackle this menace, while it has significantly strengthened its surveillance mechanism to catch any wrongdoings in the marketplace.
