SIT also suggests a limit on holding of cash
The Special Investigation Team (SIT) tasked with curbing black money has in its Third SIT Report submitted to the finance ministry has called for identification of beneficial ownership of Participatory Notes (PN). In its recommendation on PNs, SIT has said that the information of beneficial owner with the Securities and Exchange Board of India (Sebi) should be in the form of individual whose KYC information is known to Sebi. In no case should the KYC information end with name of a company. In case a company is the holder of P notes/Offshore Derivative Instruments (ODIs), Sebi should have information of its promoters/directors who exercise effective control over the company, the SIT report states. In case of companies/trusts represented by service providers like lawyers/accountants, Sebi should have information on the real owners/effective controllers of these companies/trusts.
A Participatory Note (PN) is a derivative instrument issued in foreign jurisdictions by a Foreign Institutional Investor (FII)/sub-accounts or one of its associates, against underlying Indian securities. PNs are popular among foreign investors since they allow these investors to earn returns on investment in the Indian market without undergoing the significant cost and time implications of directly investing in the India.
The SIT has also called for restrictions on transfer of PNs. PNs are transferable in nature. This makes tracing the true beneficial owner of P notes even more difficult since layering of transactions can be made so complex so as to make it impossible to track the true beneficial owner, the SIT report said. Sebi needs to examine if this provision of allowing transferring of P notes is in any way beneficial for easing foreign investment, the SIT said.
The outstanding value of Offshore Derivative Instruments (ODIs) at the end of February 2015 stood at Rs 2.715 lakh crore. The top five locations of end beneficial owner of ODIs were Cayman Islands, USA, UK, Mauritus and Bermuda contributing to 31.31%, 14.20%, 13.49%, 9.91% and 9.10% respectively of total ODIs outstanding. According to SIT, it is clear from this data provided by Sebi that a major chunk of outstanding ODIs invested in India are from Cayman Islands i.e. 31.31%. This translates to roughly Rs 85006 crore. It does not seem conceivable that a jurisdiction with a population of less than 55,000 could invest Rs 85000 crores in one country, the SIT report says.
The remarks on PNs are among a series of suggestions on how to crack down on black money. The SIT report also refers to the misuse of exemption on long term capital gains tax on shares for money laundering, use of shell companies, trade-based money laundering through mispricing of imports/exports and betting in cricket. With the collusion of promoters, some brokers arrange for price(s) with purchase of such scrips at nominal costs and sales at exorbitant prices, with a view to receiving money on sale as capital gain when the long term gain is subjected to a nil or nominal rate of tax. The advantage for manipulative taxpayer is that he can launder such sale receipts through payment of no tax, the SIT says in its report on misuse of exemption on long term capital gains tax on shares.
SIT has also suggested prescribing a reasonable threshold for holding of cash/currency notes. This would control holding of unaccounted money to a large extent. This would also control transfer of unaccounted cash from one destination to other, which at present is rampant, may be by Angadias or by other means.
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