Chasing stash in stocks

Black money is a big menace in India, no doubt. With the country's shadow economy estimated at around 25 per cent of GDP, it's a tall order for the stock markets to remain immune from the menace.

Though there is no definite estimate as to how much black or unaccounted money has flowed into Indian bourses, there are myriad ways to funnel such funds into stocks. To name a few, trading in third party account, shell companies and 'capital gains companies' are among the means that are said to be used to park unaccounted money in the stock markets.

For stock trading through a third party account, an investor opens account on the name of a third person with the help of a stock broker or other mediator. The investor invests his unaccounted money in the market via this third party account. The mediator as well as the account holder gets a commission on the transactions and investors can withdraw the amount from the account whenever they choose to.

The technique of ‘capital gains companies’ is employed primarily to legalise black money. In this, a person with stash, purchases shares of a company at face value with legal funds and then tries to inflate the stock price by asking his acquaintances and others to buy shares of the company using his own black money. He sells the stock at higher price after one year to avoid long-term capital gains tax.

Apart from these, people are also said to be using participatory notes, popular as P-Notes, to pump unaccounted moneys into the Indian stock markets and convert them into legal money. P-Notes facilitate overseas investors, HNIs and hedge funds to invest in the Indian securities without registering themselves with the market regulator Securities and Exchange Board of India (Sebi).

Foreign institutional investors (FIIs) registered with Sebi issue these notes and, therefore, these investors will not come under any regulatory scanner in India. Any dividends or capital gains accrued from these foreign portfolio investments (FPIs) will directly go to the overseas investor. P-Note investments in India hit an all-time high of Rs 2.72 lakh crore in February 2015.

They gradually went down to Rs 1.57 lakh crore in December 2016 after Sebi tightened disclosure norms and other related regulations. The market regulator, which made it mandatory in 2014 for FIIs that issues P-Notes to submit monthly reports, also made anti-money laundering laws applicable to these investments in 2016 to prevent flow of black money. Despite tightening the norms, funds through these controversial financial instruments climbed to Rs 1.78 lakh crore in March this year.

Alarmed by the trend, Sebi further tightened the norms on Wednesday to check routing of unaccounted money by Indians and NRIs into stock markets through P-Notes and other modes. The regulator is also said to be toying with the idea of allowing mutual fund investments through e-wallets. But will these measures curb black money in capital markets? Hopefully so, but people may find other ways to route their ill-gotten wealth into the stocks.