Black money: SIT tells Sebi to clamp down on misuse of P-notes; SIT concerned over stock manipulation

Black money: SIT tells Sebi to clamp down on misuse of P-notes

Remya Nair

24 July 2015


New Delhi, July 24 — The special investigation team (SIT) set up by the Supreme Court to unearth black money has recommended scrutiny of final beneficial owners of so-called participatory notes (P-notes) to curb money laundering using these instruments, stringent action against companies involved in money laundering through manipulation of stock prices and proactive detection of shell companies, among other measures.SIT, headed by former Supreme Court judge M.B. Shah, also favoured limits on cash holdings with individuals and flagged trade-based money laundering, cricket betting and donations to educational institutions as key avenues of black money generation, the finance ministry said in a statement.

In its report, SIT has recommended that capital market regulator Securities and Exchange Board of India (Sebi) should have information on beneficial ownership of P-notes and other offshore derivative instruments (ODIs) after concerns were raised that some of the money coming into the Indian stock markets through P-notes could be unaccounted wealth that is rerouted into India as foreign investment.

A P-note is a derivative instrument issued by a foreign portfolio investor (FPI) against underlying Indian securities, which allow these investors to earn returns on investment in the Indian market without undergoing the significant cost of directly investing in India.

“The information of ‘beneficial owner’ with Sebi should be in the form of an individual whose KYC (know your customer) information is known to Sebi. In no case should the KYC information end with the name of the company. In case a company is the holder of P-notes/ODIs, Sebi should have information of its promoters/directors who exercise effective control over the company,” SIT said.

SIT has also raised concerns about the transferable nature of P-notes, pointing out that transfer of P-notes makes tracing the beneficial owner more difficult. “Sebi needs to examine if this provision of allowing transfer of P-notes is in any way beneficial for easing foreign investment. Any investor wanting to invest through P-notes can always invest afresh through a foreign portfolio investor (FPI) instead of buying from a P-note holder,” SIT said.

SIT is of the view that since these instruments are traded overseas, outside the direct purview of Sebi, there are legitimate concerns about their ownership and the nature of funds invested in these instruments. It also highlighted the use of the Cayman Islands (widely perceived as a tax haven) to further its argument about misuse of this instrument.

As per data disclosed by Sebi to SIT, the outstanding value of ODIs at the end of February stood at Rs.2.7 trillion, with the Cayman Islands, the US, the UK, Mauritius and Bermuda being the top five locations of beneficial owners.

Gautam Mehra, partner at PwC India, said he appreciated the intent behind the recommendations but advised caution,

“No one can doubt the intention of the SIT in going after black money. But it should be kept in mind that there will be genuine investors also who are using this (P-notes) route,” he said. “It is a question of the regulator having the power to call for details of the ultimate beneficiary. So while the regulators should have powers to call for information if warranted, the interests of genuine investors should be protected.”

Mehra added: “Cayman Islands is a popular destination for those setting up funds, and is used by many genuine companies and per se, investors investing from there have no tax advantage.”

SIT has also asked Sebi to closely monitor sharp increases in share prices of companies as they could be used to launder money. It suggested that the capital market regulator should share this information with the Central Board of Direct Taxes and the Financial Intelligence Unit, and that action should be taken against these entities by the Enforcement Directorate under the Prevention of Money Laundering Act (PMLA).

To weed out shell companies, SIT has directed the Serious Fraud Investigation Office to regularly mine the database of the ministry of corporate affairs and look for indicators of shell companies like companies with the same address, same contact numbers, use of only mobile phone numbers, sudden and unexpected change in turnover declared in returns, etc.

SIT also favours bringing in changes in laws to ensure that cash holdings with individuals are restricted to a certain level, with provisions for confiscation beyond a certain point.

“For holding of cash/currency notes also, there should be a limit, by prescribing a reasonable threshold, maybe Rs.10 lakh or Rs.15 lakh. This will control holding of unaccounted money to a large extent. This will also control transfer of unaccounted cash from one destination to another, which at present is rampant, maybe by angadias or by other means,” SIT said.

To check trade-based money laundering through mispricing of imports/exports, SIT has recommended that all such cases detected by the Directorate of Revenue Intelligence should be shared with the Enforcement Directorate for action under PMLA.

SIT also proposes to make donations in cash received by schools and colleges a punishable offence. “For controlling such transactions, there should be a specific provision that donation shall not be accepted by cash and whosoever accepts it, will be punishable under the Prevention of Corruption Act, as if he is ‘deemed to be a public servant’,” SIT said.

SIT suggested setting up a central KYC registry to link all identity proofs. “At present, for entering into financial/business transactions, people have the option to quote their PAN, UID (Aadhaar), passport number, driving licence or any other proof of identity. However, there is no mechanism/system at present to connect the data available with each of these independent proofs. It is suggested that these databases be interconnected. This will assist in identifying multiple transactions by one person with different IDs,” SIT said.

SIT also flagged cricket betting and said the Centre should formulate laws. “Involvement of huge illegal, unaccounted money in cricket betting has been noticed by the Enforcement Directorate, where betting is being done over the Internet or using electronic gadgets,” it said.

SIT concerned over stock manipulation

25 July 2015

Financial Express

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.


* 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


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