Type 1 Transactions

The assessee has unaccounted cash which it wants to account for in its regular books of accounts without paying tax. Generation artificial long term capital gain thorough penny stocks is one of the methods used for such conversion.

PENNY STOCKS: Penny stocks are shares of unknown companies with dubious background. The financials of the companies do not support the sudden and unprecedented rise in share price.

Type 1 Transactions:-

1. Back dating of purchases: The purchases are usually accompanied by a backdated contract note showing the purchase of shares by the assessee at very low price.
2. The purchase consideration could have been paid either in cash or by cheque or by taking profit in some other genuine share transaction and adjusting the purchase price against this profit.
3. The shares are generally purchased in physical format and then converted into electronic form.
4. The transactions are generally done off market.
5. There is a collusion of purchaser with broker. The broker usually issues a fake contract note.
6. The share broker issuing contract note generally not available at the given address.

Type 2 Transactions:-

In this type of collusion/ connivance Listed Companies which are not actively traded (Penny stock) on stock exchanges.

1. Such companies first raise the funds through series of preferential allotments. Sometime they also issue bonus shares. In such case there are even mergers of two companies. Consequent to the preferential allotments, bonus issues and merger, the share capital of these companies increased manifold.
2. The review of the financial statements of these companies will reveal that that their profit after tax(PAT) and earning price per share(EPS) is constant or consistently decreasing or not justify the increase in the price of the share.
3. The Broker identifies the penny stock or illiquid stock with the low price, and then arrange for a meeting with the promoter /management of the company.

iv.Financial performances of these companies are constant or even declines year by year.

1. Management of the company promises to issue shares on preferential allotment basis when price of the shares is very low.

vi. As agreed between company/promoter and investor, the company issues shares to its investor based on the agreed terms with the lock in period of 1 year as per SEBI guidelines.

vii. Sometime after issue of preferential allotment of share, company also give Bonus shares.

viii. Company increases the price of its share, either by circular trading or by other manipulation to manifold.

INVESTIGATION:

i)Check the stock exchange on which share is traded.

ii)From the website of the stock exchange, Obtain the historical trading data of the shares. It will found that there are hardly any trades. Volumes are very less. Price generally remains low. Only spurt in price when assessee had sold the share.

iii)Analyse the financials of the company. Very low profit or loss.

iv)Sudden increase in authorized capital.

v)Obtain the DEmat Account with account opening form. Generally demat account is relatively new and the share broke is the introducer.

vi)Check the back ground of the assessee. Whether he has any business which generates cash\?

vii)Check the investment profile of the assessee. Whether he is regular investor or only one investment. If regular, see his normal profit/gain on share activity.

viii)Verify the credentials of the broker. Check the SEBI website whether the broker was banned in any of the previous years? If yes why.

ix)Check the SEBI website for credential of the share and its promoters? Whether the SEBI had banned the promoters in any of the earlier years? If year why

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