The income tax (IT) department is probing the cash flow and source of funds of some high net worth individuals (HNI) who had generously bid for shares in some of the high profile initial public offerings (IPO) that hit the market early this year. A senior official of the department, who didn’t want to be named, confirmed that the department is inquiring into the source of funds of a few HNIs, people with investible assets worth $1 million or more.
Among them, Abhishek Bachchan is believed to have applied for shares worth close to Rs 1,000 crore in the Reliance Power IPO, the official said. This could not be independently verified and an email query sent to Bachchan did not elicit a response. It is also unclear how many shares Bachchan got or still owns and the IT department asking for information is not in itself an indication of any wrongdoing. The official said Bachchan’s advance tax filing for the fiscal year 2008 was about Rs 1.75 crore.
“We have found that certain HNIs had applied for huge amount of shares in some IPOs this year, but did not have that kind of cash flow,” he said.
"We are investigating the source of money of these individuals," the official said. The department is also looking at some HNIs, who have invested in the IPO of realtor Kolte Patil Developers Ltd.
The HNIs, who are being looked at, have client equity brokerage accounts with publicly-traded domestic brokerages, Indiabulls Securities Ltd and Edelweiss Capital Ltd, the official said.
A person familiar with the matter said Indiabulls had allowed Bachchan to leverage around Rs 300 crore, while the actor invested some Rs 14 crore of his money, to place bids for the Reliance Power shares. However, this financing was completely in compliance with Reserve Bank of India (RBI) regulations on lending to clients, the same person said.
When contacted, Gagan Banga, chief executive of Indiabulls Financial Services, said: "In February, the IT department had asked for a list of our HNI clients and the amount invested by them in the Reliance Power IPO and we sent the list to the department. But the IT department is not probing Indiabulls in any such matter."
According to investment bankers and analysts, lending HNIs money to bid for shares in IPOs is one of the most lucrative business for NBFCs. Apart from high interest rates - upward of 18 per cent they typically charge clients - NBFCs, in most IPOs, also get a share of the interest income generated by banks that typically deploy investor money in overnight call money market, say several investment bankers who didn't want to identified.
Under market regulator Securities and Exchange Board of India's IPO allotment norms, 15 per cent of an issue is reserved for HNIs, 35 per cent for retail individual investors and 50 per cent for qualified institutional buyers, which are institutional investors.
Reliance Power's Rs 11,700 crore IPO, the biggest till date in India, had seen a mad rush by investors and was subscribed more than 70 times.