On June 24, 2015, finance minister Arun Jaitley was hard-selling India’s growth story to investors in San Francisco as part of his whirlwind 10-day visit to the US. During the trip, he announced that a new law would come into effect from April 1, 2016, to tackle the black money menace and a compliance window would be offered for those with undeclared assets abroad to come clean by paying a penalty. What’s interesting about the whole brouhaha over money stored in Swiss vaults is that an equivalent amount of black money — if not more — is milling around on Indian shores. And as enterprising as that might seem, some individuals have already found a new route — one that leads straight to Dalal Street — to convert their illegitimate money into white.
Five days later, when Rajeev Agarwal put out an ex parte ad interim order barring four companies, 235 individuals and other entities for price-rigging and manipulation, it was not the kind of order that everyone is used to seeing from the market regulator. Instead, the investigation by the Sebi director — an IIT Roorkee alumnus and a former income tax commissioner — was an eye-opener that gave insights into the ingenious method being employed to launder money. The Bombay Stock Exchange’s (BSE) platform to help small and medium enterprises (SME) access the capital market was the perfect hunting ground, thanks to lax regulations and an overzealous exchange authority that had thrown open the gates of the platform to just about anyone.
So, what was the June 29, 2015 order all about? The market regulator has alleged that four companies — Eco Friendly Food Processing Park, Esteem Bio Organic Food Processing, Channel Nine Entertainment and HPC Biosciences — were engaged in the following modus operandi: a shell company would make a preferential allotment to select investors at a relatively insignificant premium before floating the issue. When the lock-in period expired after a year, the select shareholders would sell the shares to related entities at a much higher valuation.
The super-normal gains qualified for tax exemption as they were held for more than a year. In the course of the entire operation, the shareholders had effectively handed over the black money to an intermediary or entity that converts black money into white by facilitating stock market transactions. The related entities,