NEW DELHI — A Supreme Court-appointed special investigations team said regulators need to provide greater oversight of money laundering in stocks as well as "black money" being repatriated to the country through investments in equity derivative products.
The recommendations were part of a report detailing the need for an effective monitoring mechanism across a variety of activities that have long been suspected of being fronts to avoid taxes, including via shell companies, imports and exports, or even cricket bets. The panel felt that SEBI could do a lot more than what it is doing currently to check the flow of black money.
Among the proposals, the panel said the market regulator, Securities and Exchange Board of India (SEBI), needed to ensure it can better identify owners behind overseas investments into participatory-notes (P-notes), or popular derivative products that track domestic equity markets. Regulators have long suspected flows into P-notes are in reality domestic money being repatriated back into India because of looser registration standards for owners of these products.
For example, the panel noted that 850 billion rupees had flowed to P-notes from the Cayman Islands, a jurisdiction with a population of less than 55,000. About 2.75 trillion rupees worth of P-notes were outstanding as of the end of June. "It does not appear possible for the final beneficial owner of ODIs (offshore derivative instruments) originating from Cayman Islands to be from that jurisdiction," the panel wrote in the report.
The panel also recommended SEBI examine whether P-Notes should be allowed to be transferred, saying it made it harder to trace "the true beneficial owner" of these derivative products. It asked SEBI to investigate cases where shares of penny-stock companies are used in pump-and-dump schemes to launder money and evade taxes.
The panel said the government needed to become more proactive about going after shell companies used to launder black money and take stronger action against the use of inflated imports and export bills to move illicit funds.
India has long suffered from so-called black money, or funds illegally deposited in banks outside the country to avoid tax. A report by Washington-based think-tank Global Financial Integrity estimated that India suffered $344 billion in illicit fund outflows between 2002 and 2011.
The special investigations team was set up last May to investigate black money, a key priority for Prime Minister Narendra Modi's government, which this year unveiled tougher penalties against people convicted of illicitly stashing wealth abroad.