Why Kolkata ?
Illiquid scripts are ramped up to generate cash. The detailed explanation of this scheme was found in the article
Traders were using the listed but illiquid shell companies in the same manner to manage tax liabilities on capital gains. Short-term capital gains, for instance, can only be set off against short-term losses. To minimize tax liabilities on short-term speculative gains, investors need to buy losses. These loss entries are easily available in the Kolkata ecosystem.
According to certain estimates there are 16,000 companies registered in Kolkata which were not doing any real business, and were used in laundering money and rationalize tax liabilities.
Stock Market Compliance
Though in most of the cases, they were blatant to evade taxes, almost all these firms were compliant with listing and other norms. Hence, stock exchanges could not halt trading in their shares.
These companies were controlled by operators (who drive the prices in the stock markets) and each operator would run several such shell companies. In the analysis done by the Riskpro Management Consulting, it was observed that there are more than 15 such operators who were managing atleast 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.
Regtechtimes compiles the list of many such Jama Kharchi companies and provide different insights about the risk associated with these companies