Black money chase: Money-pooling schemes, buying stocks under income tax lens

Demonetisation had led to increased detection of illegal money-pooling schemes, says tax official

In order to identify the prospects of misuse of phased out high-value notes, tax and enforcement authorities have asked regulators to furnish details of all kinds of money-pooling schemes as such a practice is believed to have suddenly become active in managing black money.

Besides, the income tax department is said to have also asked various market intermediaries such as brokerages and depositories to report physical buying of shares or mutual funds of worth Rs 50,000 and above.

Tax authorities have noted that the demonetisation drive had led to increased detection of Ponzi schemes or illegal money pooling schemes to hide unaccounted wealth.

According to the income tax sources, the department is keeping tabs on the mobilisation of funds, which is being regulated by different regulators. “There is a huge element of money laundering in illegal public deposit schemes across the country, which is said to have increased due to partial demonetisation of the currency,” said a senior I-T official. 

At present there are more than 10 such types of deposit-taking and money-pooling schemes and each is governed by a different set of rules and often falls under the ambit of different regulators. For example, the mobilisation of funds by non-banking finance companies is regulated by the Reserve Bank of India (RBI); gold savings schemes by jewellers are regulated by RBI and the ministry of corporate affairs (MCA). Some chit funds come under state authorities and collective investment schemes (CIS) are under the Securities and Exchange Board of India (Sebi).

Taking advantage of people’s discomfort on disclosing their cash deposits to banks, the promoters of such schemes lure investors to a scheme by promising high returns on investment while also guaranteeing the security of the investment made by them, explained the official.

On the cash buying of stocks and mutual funds, experts feel it is cumbersome to detect such a practice. “It is difficult to keep account of physical buying of mutual funds as very few among them accept cash. The customer needs to go to the particular bank branch which a fund house or asset management company (AMC) has the tie up with. “Typically, AMCs are supposed to report to authorities on a monthly basis if there is a purchase beyond the limit (up to Rs 50,000), irrespective of whether paid for by cash or cheque. However, with the intent to escape tax scrutiny, people usually pay Rs 49,999,” said a market expert requested anonymity.

Establishing money laundering is yet another challenge for tax authorities, say experts. “It is strenuous to find a link to demonetisation of existing Rs 500 and Rs 1,000 currency notes with investment of cash into stock markets. Though some amount of nefarious activities by back-dating transfer of securities and payment obligations under a contract or collateral requirements cannot be ruled out — which also cannot be said to be CIS to be regulated by Sebi. That will typically be a fraud, if at all,” said Sumit Agrawal, former Sebi official & partner, Suvan Law Advisors. 

However, chances of any intermediaries using money mules to legalise their stashed currency by scheming gullible people or using benami demat accounts to knowingly or unknowingly act as investors for channeling illegal cash into the stock exchange system is also difficult due to the mandatory PAN & KYC, Agrawal said.