Shell companies: Sebi gears to break 'big black money bonhomie'

Sebi had recently restricted share trading of 331 suspected 'shell' companies, but the Securities Appellate Tribunal had reversed the decision for some firms. Sebi, however, has been permitted to probe the suspected companies who could have violated securities laws, according to a PTI report. Sebi's investigation has the potential to open a can of worms as the nexus between builders, brokers and Bollywood entities is reportedly under scanner. A regulatory official described it as a "big black money bonhomie". Also the term 'shell' companies could be misleading. Even credible companies can act as shell companies and provide a platform for money laundering and convert black money into white, according to an official.

It's not just small brokers who are in the list of suspected shell firms, even bigger brokerage groups are being probed by Sebi, the PTI quoted another official. The  I-T Department, ED and SFIO (Serious Fraud Investigation Office) are also looking into the suspected shell firms apart from Sebi. The agencies are sharing the details of their with each other, the official said.

Some brokers are believed to have created a panic-like situation in the stock market after Sebi's action to restrict trading in shares of 331 firms as they wanted to get their money out, the official said. Sebi's restrictions would have safeguarded the interest of minority shareholders.

The companies that are under investigation may have been most active after Prime Minister Narendra Modi's decision to demonetise Rs 500 and Rs 1,000 notes. They had allegedly indulged in huge cash dealings after demonetisation. According to government officials, as much as 500 companies, including both listed and unlisted, are under investigation, but the details have not been made public as some of the matters are sensitive and the agencies want to safeguard their investigation. Some of these companies are linked to the real estate sector, commodities and stock broking, entertainment industry, plantation and non-banking financial services.

"Another worrying trend is that several of these companies, including listed ones, could have helped launder money collected illegally by unlawful money-pooling schemes by groups already barred by one or other regulator," said one of the officials who didnt want to be named as investigations are underway.

Also under the scanner is funds shown as foreign or domestic private equity investment by suspected shell firms. The suspected firms are being asked to explain these links and all suspicious dealings.

Some of these firms have shown on their books contracts that are not related to any actual work and could have been mentioned just to inflate turnover, while a few of them are already barred by various authorities across the country.

The last weeks action on suspected 331 listed firms has already been followed up with Sebi asking exchanges and brokers to verify credentials of 107 unlisted entities and bar them from trading if results are found unsatisfactory.

This list also mostly includes entities supposed to be engaged in real estate, plantation, trading and finance related businesses.

These lists were shared with Sebi by the Ministry of Corporate Affairs and are based on ongoing investigations by various agencies including the income tax department and SFIO.

These companies need to provide auditor certificates, annual income tax return filings, status of any pending disputes with the income tax department, and status of compliance with all the requirements of the Companies Act.

 (With inputs from PTI)