Red flagging the misuse of Participatory Notes (P-Notes) for money laundering, the special investigation team (SIT) on black money has urged the government to obtain ‘beneficial ownership’ of these instruments while considering making it non-transferable.
In its third report submitted to the government on Friday, the SIT said that the Securities and Exchange Board of India, should also ensure that the information of such beneficial owners is in form of individuals whose KYC information is known while in no case should the KYC information end with name of a company.
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The report also questioned the need of allowing transferring of P-Notes as it makes tracing the ‘true beneficial owner’ of P-Notes even more difficult as layering of transactions can be made complex to make it impossible to track the owner.
“Sebi needs to examine if this provision of allowing transferring of P-Notes is in any way beneficial for easing foreign investment. Any investor wanting to invest through P-Notes can always invest afresh through Foreign Portfolio Investor (FPI) instead of buying from a P note holder,” the SIT has said.
According to the SIT, the outstanding value of offshore derivative instruments as on February 2015 stood at Rs 2.715 lakh crore with the top five locations of ultimate beneficial owners of ODIs (offshore derivative instruments) being Cayman Islands, the US, the UK, Mauritius and Bermuda contributing 31.31 per cent, 14.20 per cent, 13.49 per cent, 9.91 per cent and 9.10 per cent respectively of total ODIs outstanding.
Further, the SIT also recommended stringent actions, including prosecution, against entities misusing the exemption on long-term capital gains tax while asking the market regulator to put in place an effective mechanism to study unusual rise of stock prices of companies. It made a strong case for effective deterrence as “barring such entities from securities market would not be of strong deterrence in itself”, even as it urged Sebi to inform the enforcement directorate to take action under the prevention of money laundering act as well.
For detection of shell companies and their creation, the panel, headed by Justice MB Shah, said that the Serious Frauds investigation Office (SFIO) will have to actively mine the MCA 21 database for certain red flag indicators. It is to be noted that the Early Warning System, which the ministry of corporate affairs had installed in 2010, has been wrapped up following its ineffectiveness.
The SIT also told the ministry to share information on such high risk companies with law enforcement agencies such as the FIU and the CBDT for closer surveillance.
“It has also been observed that in many cases of creation of shell companies the shareholders or directors of such companies are persons of limited financial means like drivers, cooks or other employees of main persons who intend to launder black money. Section 89(1) and 89(2) of the Companies Act, 2013, provides for persons to declare if they have “beneficial interest” in the shares of the Company or not,” the report said.
Further, amid the controversies surrounding the Indian Premier League (IPL), the Shah panel has recommended that to tackle generation of black money due to cricket betting, “some appropriate legislative directions or rules or regulations” need to be put in place to curb the menace.