Sebi investigating 500 cases of raising Rs 2 lakh crore in illegal funds

As many as 500 cases have come under the scanner of revenue intelligence agencies and capital markets regulator Sebi for raising a whopping Rs 2 lakh crore illegally in the guise of non-convertible debentures and private placements.

Suspecting that these financial instruments are being misused to launder black money, the revenue intelligence agencies have shared the details with the Securities and Exchange Board of India (Sebi) and other regulators for further action, official sources said.

While the issuance of NCDs and Private Placement of securities are genuine financial transactions, the probe indicates that several unlisted companies have taken advantage of regulatory gaps in at least 500 cases to mobilise funds to the tune of about Rs 2 lakh crore without complying with Sebi's and other regulations.

The NCDs are financial instruments that cannot be converted into shares, while private placement of shares does not involve public shareholders and needs to be limited to a maximum of 49 investors.

Sources said NCDs and Private Placement Programmes (PPPs) have emerged as key modes for disguising black money as genuine funds, resulting into a stricter vigil on such activities by revenue intelligence agencies and the financial market regulators including Sebi.

It has been noticed that a large number of small financial companies have mushroomed in the recent past, while taking advantage of certain regulatory gaps.

To check the menace, it has been proposed to put in place an early warning system by way of timely intimation by ROC to Sebi about such cases.

"The issue is being deliberated upon at the highest level and necessary measures will be put in place so that illegal money is not routes through NDCs," a revenue intelligence official said.

He said a multi-agency team is looking into the cases of routing of money via NDCs by these financial companies.

In a recent caution notice to investors, Sebi also said that "some unlisted companies are luring retail investors by issuing securities including non convertible debentures or non-convertible preference shares in the garb of private placement, without complying with the provisions of Companies Act and Sebi Regulations."

These firms have avoided Sebi scrutiny by non-disclosure of key information, such as number of investors and the type of financial instruments used to garner the funds.

Any fund-garnering exercise involving over 49 investors becomes public offering and comes under Sebi's purview.

While most of these companies did not provide correct and complete information to Registrar of Companies (ROC) and Sebi, the investigations found that such instruments were issued to more than 49 investors and therefore they were actually public issues and not private placements as claimed.

'Private Placement' can only be made to persons whose names are recorded by the company prior to the invitation to subscribe and such companies cannot release any advertisement or utilise other marketing or distribution channels or agents to inform the public at large about such an offer.

Further, such offers cannot be made to more than 200 persons in the aggregate in a financial year.

Sebi said it has taken action against 112 such entities, since January 2013 for issuance of securities in the form of non-convertible preference shares or non-convertible debentures to public, without complying with the norms.

The regulator had also cautioned the investors against subscribing to such issues.