The tax authorities are taking a hard look at how the disgraced promoter of Satyam Computer Services, B Ramalinga Raju, used money raised through pledging of shares. The move will enable the income-tax department to trace some of the undisclosed income of Mr Raju, his family members and their investment firmsan exercise that is distinctly different from the current probe on diversion of Satyams funds.

The promoters of the Satyam group have regularly pledged their stocks, including shares of Maytas Infra, to mop up funds. Till date, there is little information on what they have done with the money. Its perceived that the money may have been used to trade in stocks and properties during the unprecedented bull run in the past few years. While these are legitimate transactions, authorities suspect large-scale evasion of capital gains tax on these deals.

The shareholding of Mr Raju and his family in Satyam fell to 3.6% on January 7 from 8.27% at the end of the September quarter, after institutional investors sold shares pledged with them by SRSR Holdings, the corporate entity holding the promoters shares. The pledging was done over a period to raise money.

nsider trading angle to be probed

There would be capital gains tax implications if the money was used to buy and sell property, said a senior tax official. Going by the income-tax law, if an individual or a trust sells a capital asset like an immovable property after 36 months from the date of acquisition, the gains from such sale will be treated as capital gains tax and taxed at 20% with indexation benefits.

While the entity that is borrowing the money may have booked the interest outgo on such loans to lower its tax liability, it could have suppressed the gains made from such deals.

According to a senior chartered accountant, the scope of such investigations will inevitably cover transactions that boil down to insider trading. The tax department may cross-check whether the declaration given by Mr Rajus investment companies are genuine. For instance, if the promoters had bought and sold Satyam shares through various outfits, using information they are privy to, it not only amounts to insider trading, but could also be passed as long-term capital gains. The investment entity may have given a false declaration that it has been holding the shares for more than one year, he said.

The tax department may also look at whether lenders (with whom promoters had pledged their shares) sold the securities in off-market deals.
In such a case, the transaction would attract capital gains tax. A tax waiver on long-term capital gains is granted only if the shares are sold through the stock exchange after paying the securities transaction tax.

Any diversion of companys funds, say from its fixed deposits, and subsequent gain from trades would lead to a tax claim on Satyam, and not on the promoter. In his confession, Mr Raju had said Satyams profits were inflated. Thus, technically, Satyam can claim a refund if the restated accounts reflect a lower profit than what was reported in the books. If the taxman can prove that the promoters evaded taxes, at least some money would flow into the kitty.

A multi-dimensional probe has been launched by investigating agencies, including the income-tax department, after Mr Raju confessed on January 7 to perpetrating a Rs 7,000-crore financial fraud at Satyam by inflating sales, profits and cash balances. Investigating agencies suspect that he may have siphoned off thousands of crores to buy land and real estate. Deloitte Haskins & Sells and KPMG have been appointed to restate the accounts of Satyam.