The Supreme Court-appointed special investigations team (SIT) on black money has recommended restrictions on the physical holding and transportation of cash, as well as higher regulatory oversight on the ultimate investors of participatory notes (P-notes) issued by foreign portfolio investors (FPIs), in order to check the generation and circulation of unaccounted wealth in the economy.
The recommendations by the SIT headed by M B Shah highlighted how some entities use shell companies, imports and exports, cricket betting and donations to schools and religious institutions to generate and launder black money.
The SIT expressed serious concern on the manipulation of stocks, especially by showing long-term capital gains (LTCG) in penny stocks to launder unaccounted wealth. There is no LTCG tax if stocks are held for more than 12 months and traded on exchange platforms.
The Securities and Exchange Board of India (Sebi) recently barred more than 250 entities, including individuals and companies, from the securities market for suspected tax evasion and laundering of black money through stock market platforms.
The SIT said the market regulator Sebi needed to ensure it can better identify owners behind foreign investments into participatory notes.
Giving an example, the SIT said that R85,006 crore have flowed via P-notes from the Cayman Islands, a jurisdiction with a population of 54,397. “It does not seem conceivable that a jurisdiction with a population of less than 55,000 could invest R85,000 crore in one country,” it said. As on February 205, about R2.75 lakh-crore worth of P-notes were outstanding. The panel also recommended Sebi to examine whether P-notes should be allowed to be transferred, as it makes it harder to trace “the true beneficial owner”.
The SIT said its earlier suggestion of imposing a limit on the possession of cash, i.e., R10 lakh or R15 lakh, should be implemented to control stashing of black money.
“If holding of cash is restricted and regulated, to a large extent, it would control circulation of black money within the country and discourage stashing of money abroad,” it said.
The SIT was set up in May last year to investigate black money, a key plank on which the Narendra Modi government came to power. Since then, the government has made tougher rules to penalise and prosecute people illicitly stashing wealth abroad.
The SIT also said the government has to take proactive steps to detect shell companies used to launder black money and take stronger action against the use of inflated imports and export bills to turn black money into white.
In its third report, the SIT flagged the”involvement” of huge illegal and unaccounted money in cricket betting, especially in the Indian Premier League (IPL), and made a case for effective legislative steps to deal with the menace.
For the detection of shell companies and their creation, the Shah panel said that the Serious Frauds investigation Office (SFIO) will have to actively mine the MCA 21 database for certain red flag indicators.
“These red flag indicators could be based on common DIN (director identification number) numbers in multiple companies, companies with same address, same contact numbers, use of only mobile numbers, sudden and unexpected change in turnover declared in returns,” the report said.
It is to be noted that the early warning system, which the ministry of corporate affairs had installed in 2010, has been wrapped up following its ineffectiveness.
Suggestions
* The SIT on black money has recommended restrictions on the physical holding and transportation of cash. It said Sebi needs to ensure it can better identify owners behind foreign investments into P-notes
* To detect shell firms, it said the SFIO will have to actively mine the MCA 21 database for certain red flag indicators
* It has highlighted the use of donations to schools & religious institutions to generate and launder black money
