40% SEBI Banned Shell Companies are traced in Kolkata

Jama Kharchi Companies are found to be operational in Kolkata

In August 2017, SEBI took a significant step. The Indian securities regulator made certain decisions that affected a specific type of company known as a “shell company.” The action taken by the Indian securities regulator brought Kolkata to the forefront of Shell Companies. SEBI imposed restrictions on a total of 331 shell companies. These shell companies are a particular kind of business entity that often raises concerns due to their activities or lack thereof. In simple terms, they might exist only on paper without engaging in any real business operations.

Out of these 331 shell companies, it’s fascinating to see that more than 40% of them, which is a big chunk, are actually from Kolkata city. This means that a large number of SEBI Banned Companies, have their official records indicating that they are based or registered in Kolkata.

Why Kolkata shell companies?

Kolkata, often called the “City of Joy,” has gained a different kind of fame – being a hotspot for shell companies in India. These companies, known for existing on paper with little to no actual operations or assets, have found a home in Kolkata.
Why Kolkata, you ask? There are a couple of reasons that make the city an ideal choice. One of the key factors that turned Kolkata into a shell company haven is the availability of expertise. It’s a unique scenario where everyone, from a peon to a car driver, a security guard to a cleaner, seems to have a directorial role. This expertise spreads to the financial realm, too.

Read More about Techniques of Stock Market Laundering.

The availability of professionals skilled in forming and managing shell companies plays a significant role. With a well-established network, Kolkata has become a breeding ground for these “paper companies.” Kolkata’s strength lies in its community of chartered accountants (CAs) who readily act as “directors” for these companies. They charge a nominal fee to sign anywhere, making the process seamless. Moreover, the cost of hiring a CA in Kolkata is significantly lower than in Mumbai, adding to the city’s appeal.
Chartered accountants in Kolkata employ innovative methods to strategize taxation. Chartered accountants in Kolkata employ innovative methods to strategize taxation.

Synchronized Trading

These tactics, sometimes questionable, often involve techniques like “Synchronized trading.” Synchronized trading is a complex maneuver that involves matching orders in a way that benefits stakeholders while evading taxes. This practice raises eyebrows because it skirts the boundaries of legality. The process includes real transactions, but they lead to tax evasion.

For instance, those seeking losses acquire stocks or options at higher prices. On the other side, companies aiming for profit sell shares at elevated prices to gain long-term capital gain entries. This intricate dance of buy and sell is orchestrated with precision.

Synchronized trading is illegal under the law. Buy and Sell orders are matched to benefit the stakeholders. However, it is not an easy task to identify these entries. Traders in Kolkata exploited the realm of shell companies to manage tax liabilities associated with capital gains. For example, the taxation framework stipulates that short-term capital gains can only be offset against short-term losses. To optimize their tax liabilities on short-term speculative gains, investors had to seek out losses. And where did they find these elusive loss entries? The Kolkata ecosystem seemed to offer a ready solution.

Jama-Kharchi Companies

Jama Kharchi Companies refer to firms that have gained notoriety for engaging in cash laundering and tax evasion practices. These companies have credits (Jama) and Debits (Kharchi) on paper. But they operate in the shadows, using clever tricks to manipulate financial records and transactions. Additionally, there are Entry Operators. They are often chartered accountants or middlemen, who provide cheques to beneficiaries who want to convert their unaccounted cash into legal money. These entry operators then use the cash for bogus transactions, raising fake bills and inflating expenses. In return, they earn a commission.

In essence, Jama Kharchi Companies manipulate financial records to deceive authorities and create an illusion of legitimate business activities. This way, they attempt to evade taxes and launder money, all while operating in the shadows.

The way Jama Kharchi Companies operate has big consequences. They mess up the financial system, make people doubt how businesses work, and also lead to the government losing money. Sometimes, authorities notice the transactions in the bank accounts of these companies as suspicious. Jama Kharchi companies do not provide genuine identification records. And guess what? The KYC documents in banks’ possession are also fake. This makes it the banks’ responsibility to not follow the rules about knowing their customers (KYC). And because of this, having experts who know about KYC, like the Certified KYC Expert from Indiaforensic, is even more important. 

Stock Market Compliance

Many firms played a tricky game by dodging taxes, but here’s the twist – most of them followed the rules of stock exchange compliance. This clever move made it hard for stock exchanges to stop trading their shares. These firms had puppet masters known as operators. These operators are also the ones who influence stock prices. Imagine one operator like a puppeteer controlling multiple shell companies – these are the firms involved in shady activities.

In the analysis done by Riskpro Management Consulting, it was observed that there are more than 15 such operators who were managing at least 100 companies each.

The operators hid behind name lenders and proxies. In many cases, they were found to be people in distress, who would “sell their signature” for small sums of money.

Kolkata has historically been the “Mecca of parallel banking”, or informal trade financing. Hence it is no surprise that more than 40% of the SEBI-classified shell companies belong to Kolkata.