Having declared from the ramparts of the Red Fort that he would bell the black money cat, Prime Minister Narendra Modi now has an opportunity to act on his words. He must not let his government get cold feet on the report of the apex court's special investigative team (SIT) on black money. The report has verifiably exposed the links between Indian stock market and international tax havens. Constituting an SIT reflected his determination to tackle black money, but the finance minister's timid reaction to the report, subsequent to fall in stock markets, now suggests the government may eat humble pie on the issue of black money.
The investors, obviously, shook with trepidation on the SIT report and this was enough for the government to assure them that their action (read inaction) on the report would not disturb the market. The corollary for us to read here is ties between the tax havens and markets will continue undisturbed. This is exactly the same path that the Congress chose to tread on during their tenure.
For the first time an SIT of two judges has reached certain definitive conclusions on black money under the Supreme Court's supervision after scrutinising government documents and official information. This could well be a blueprint to keep a check on the export and import of black money.
The first conclusion is that black money parked in tax havens is getting siphoned into share markets via participatory notes (P-notes). Second, companies that exist only on paper (letter box companies) are the greatest source of circulating and laundering black money and third, special economic zones (SEZs) in different states are explicit hubs of money laundering.
P-notes are financial instruments which foreign investors registered in India (FII) issue to investors based in foreign lands. These investors, thus, can invest in the Indian share market without getting registered with SEBI as FIIs. Technically, the investors using P-notes are called beneficial owners (BO). Their identities are often suspect. The issue of their disclosed identity is being debated across global taxation forums. United Kingdom considers BO as a means to evade taxation. It has passed a law about corporate transparency to check the BO business, which will be implemented there from January 2016. In India, a parliamentary committee and few expert groups have also raised questions over P-notes.
It is essential to understand the role that P-notes play in the context of India as the SIT has furnished vital information about the same with the help of the SEBI which was not available so far. Of the entire offshore derivative investment (ODI) in India, about 80 per cent comes through beneficial owners from Cayman Islands (31 per cent), America (14 per cent), UK (13.5 per cent), Mauritius (9.9 per cent) and Bermuda (9.1 per cent). Some of these are declared tax havens. According to the SEBI statistics, by February 2015 ODI stood at Rs 2.7 lakh crore in Indian markets. Rs 85,000 crore investment came from Cayman Islands (population: 60,000) alone. This indicates that Indian investors are bringing black money on a large scale through P-notes into the Indian market via tax havens. This is an opportune time for the government to start a campaign against flaws in P-notes to combat routing of black money in share markets from tax havens.
The dust on electoral pontification on black money has almost settled. The Modi government's law on black money cuts no ice with the parallel economy apart from enabling the bureaucracy to harass citizens. In fact, the real agenda to fight black money has been produced by the SIT which can be the basis for the government's will to combat this menace.
If the Modi government is serious about tracking down black money hoarded in and outside the country, they will have to take the following three steps immediately: First, identification of P-notes holders (beneficial owners) must be made compulsory as foreign investors choose P-notes either to evade Securities Transaction Tax (STT) or to hide their identity to route money through tax havens. This could easily be achieved by liberalising STT regime.
Second, the Company Law (section 89/4) should be strengthened and the Serious Fraud Office under the finance ministry should come down heavily on letter box companies, which conceal and launder black money.
Third, the finance ministry's directorate of revenue intelligence (DRI) has been telling the government that SEZs have become hubs of organized money laundering and these factories of black money can be shut down with stern action.
It is difficult to grasp why Modi is missing every such opportunity that might showcase this government as a courageous and decisive one. Not only has he got a grand mandate to introduce bold reforms, but also the courts stand by him on the issue of black money and transparency. Despite this if the government does not act on the SIT report and decides to stay in the same shell as its predecessors did, it raises serious suspicion on their intent.