Investors have to watch out for one more risk now — ED/IT raid!

Nowadays, Central Government agencies such as the Income-tax department and the Enforcement Directorate (ED) are creating ripples in financial markets, with a host of companies coming under their radar.

Some developments that have created shockwaves include raids/ searches on Polycab India, One97 Communications (Paytm), India Cements and Sobha. Often, such adverse news sends the stock prices of companies into a tailspin.

For instance, Polycab India’s shares plunged nearly 30 per cent during January 5-8 on reports that the income-tax department had detected “unaccounted cash sales” of about ₹1,000 crore during a raid on the group. Similarly, the stock of India Cements slumped nearly 10 per cent on February 1 amid reports of ED raid.

Paytm, which tumbled after the Reserve Bank of India initiated action against its associate Paytm Payments Bank, remained under pressure on reports that the ED might start a formal investigation following RBI findings.

Vague disclosure

Both the income-tax department and the ED play crucial roles in investigating significant financial irregularities. Given the substantial impact of their findings, transparent disclosures by these agencies following raids will help alleviate uncertainty for investors.

As of now, the releases of the authorities are quite vague. For instance, a clarification from the Income-Tax department said that during search and seizure operations at the premises of a company manufacturing wires, cables and other electrical items (which according to assumption of many is Polycab), credible evidence was recovered, establishing that the group made unaccounted cash sales of around ₹1,000 crore, which are not recorded in the books of accounts.

“Evidence of unaccounted cash payments of more than ₹400 crore made by a distributor, on behalf of the flagship company towards purchases of raw materials, have also been seized. Further, non-genuine expenses in the nature of sub-contracting expenses, purchases and transport expenses, etc. aggregating to about ₹100 crore have also been identified in the seized evidence from the premises of the flagship company,” it said.

Vague info

When clarification was sought by the exchanges, Polycab said, “The company understands that there is a press release titled ‘Income Tax Department conducts search operations in Mumbai’ published on January 10, 2024 (at 8:06 pm) by Press Information Bureau, Delhi, which does not specifically name any company.” The company has not received any written communication from the IT Department regarding the outcome of the search, it further clarified.

According to India Cements, “Certain Officials of Enforcement Directorate visited their Corporate Office in Chennai during 31.01.2024 and 01.02.2024 and conducted a search to find out any irregularities concerning ‘FEMA’. We have provided/ undertaken to provide all the clarification/documents sought by them.”

Till now, investors are in the dark in most cases regarding the probe. The central agencies must come out with more detailed clarification instead of mundane responses.

SEBI has tightened disclosure norms for companies. Now, corporates need to disclose within 24 hours in case of revision in rating, fraud, or defaults by a listed entity, its promoter, or directors; restructuring of loans from banks, one-time settlement with a bank, and winding-up petition filed by any party/creditor.

Exchanges should also go after companies to come out with more information on searches/raids instead of satisfying themselves with the routine responses. Bourses must get the details of Information provided to the agencies by the companies and also the nature of search/raid.

On its part, the regulator can also ask the details from the central agencies and can pass them through the exchanges without impacting the probe.

If there is any legal/procedural hurdle in getting the required information from ED/IT, SEBI can even escalate the issue with Finance Ministry and get the rules amended to procure the details. This will not only improve the disclosure system but also enhance the integrity of financial markets as well.

COMMENT NOW