SEBI to catch hold of money launder activities and tax evasion by making use of SME as a base

MUMBAI: Capital market regulator Sebi is investigating a string of trades in stocks of small and medium enterprises (SME) and derivatives like currency options carried out to launder money and escape tax.

Persons with unaccounted cash are suspected to have misused the SME trading platform of exchanges to show the money as legitimate trading income. Another set of people, on the other side of the deals, did the reverse ” converting a slice of their official I ncome into unreported cash or “black money” to book fake expense or loss that would lower earnings and tax. The trades typically happened in the run-up to the quarterly closing and a few months preceding the end of a financial year.

The regulator and bourses offered the SME platform as an avenue to enable small companies to raise funds with fewer formalities and disclosures. But it appears that some may have taken advantage of easier rules to list companies that serve as money laundering machines.

After the deal is cut, trading interest in the counter wanes and the stock slips back closer to its listing price or below. Occasionally, the company informs the exchange about the change of promoter.

“There is no need to incorporate a company, apply for listing and open demat accounts. Also, transaction cost is lower. Multiple trades in out-of money options help an option buyer to convert black (money) into white. The conversion does not happen in one or two deals.

Since out-of-money options are illiquid contracts that do not typically attract genuine market participants, the buyer and seller can go on repeating such deals in the far end of the market. The buyer of the call option ” who books profit ” converts black money or cash into white, while the option seller (who receives the premium) does the opposite.

Outside the exchange and with the help of a broker (who puts through the option trades), cash moves from the buyer to the seller who shows losses, lowers tax and gets back large part of the amount in cash.

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