A 'black money bonhomie' has come under the scanner involving builders, brokers and Bollywood entities as a multi-agency probe gets underway to pierce the corporate veil of hundreds of suspected shell companies.
Sebi has begun shooting off show-cause notices to 331 listed entities, suspected to have acted as 'shell companies' for those with illicit funds, while action has also begun against more than 100 unlisted entities that could have traded in stocks with laundered money, top regulatory and government sources said.
While the capital market regulator Sebi's decision to restrict share trading has been reversed in case of some firms after they approached the Securities Appellate Tribunal, it has been permitted to go ahead with its probe against them and others who could have violated securities laws.
While many of these companies have gone public to deny any wrongdoing and have said they are not 'shell companies', a top official said a wrong perception has got created about this nomenclature and even established and well-known firms can act as 'shell companies' by providing a platform for money laundering and converting black money into white.
While several small brokers are already in the list of 'suspected shell firms', their links to bigger brokerage groups are being probed by Sebi, another official said.
Also under the scanner is the role of some brokers in creating a 'panic-like situation' in the stock market after Sebi's action to restrict trading in shares of 331 firms, he said, while adding that the move would have safeguarded the interest of minority shareholders but the brokers with their 'skin in the game' wanted to get their money out.
As Sebi (Securities and Exchange Board of India) continues its probe, affairs of these companies are also being looked into by agencies such as I-T department, ED and SFIO (Serious Fraud Investigation Office) to unravel what one top regulatory official described as a "big black money bonhomie".
Several of these firms are also suspected to have indulged in huge cash dealings post-demonetisation.
Marking coordinated efforts on their parts, the regulatory and investigative agencies are sharing their investigation reports with each other, the official said.
Citing official documents and preliminary probe findings, multiple regulatory and government officials said nearly 500 entities (including listed and unlisted ones) are currently being probed but some of the names have not been made public yet due to the sensitivity of the matter and to safeguard the investigation process.
Any action against such 'big names' would take place after the investigation has reached some conclusive stage, they added.
A large number of companies having acted as 'shell firms' are linked to businesses like real estate, commodities and stock broking, films and television (including those on digital platforms), plantation and non-banking financial services, the officials said.
"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 didn't 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 week's 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.