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GDRs being used to route black money back in the country,says I-T dept; initiates study

Global Depository Receipts,a popular vehicle to raise capital from overseas markets,is emerging as a new method to round-trip black money into the country

Written by Shruti Srivastava | New Delhi | Published: June 14, 2012 1:02:23 am

Global Depository Receipts (GDRs),a popular vehicle to raise capital from overseas markets,is emerging as a new method to round-trip black money into the country,the Income Tax Department has found out. The department has initiated a study on companies that have issued GDRs over the last five years on an assumption that almost half of these companies could be front entities employed for round-tripping.

Sources in the department told The Indian Express that Luxembourg is emerging as a favoured nation for this exercise after Mauritius and Singapore. Data available with the capital markets regulator Securities and Exchange Board of India (Sebi) shows that most of the GDR-issuing companies are based out of Luxembourg,Singapore and London,leading the tax authorities to intensify their probe.

“Almost half of the companies which have issued GDRs are shell companies. They have not paid taxes and are being used as conduits for routing black money. This is a new area that has emerged for generating black money,” the source said.

Round tripping occurs when an investor sends money from one country to another and then routes it back to the original country dressed up as foreign capital.

The tax department suspects that most of these companies are start-ups existing only on paper with no tangible business and issue GDRs to raise money,which is later brought back into the country. Sources in the know say that very little trading occurs on these GDRs.

The recently released White Paper on Black Money quoted a Sebi order of September 21,2011 that said,“Surprisingly mysterious ‘initial investors’ were found ready to invest in GDRs issued by companies which were either start-ups or having shares with very little trading and after two-three years sold the GDRs at deep discounts taking heavy losses.”

“It is possible that a large amount of money transferred outside India might actually have returned through these means,” the White Paper said and cited instances that were taken note of by Sebi where GDRs issued by some Indian companies,listed on the Luxembourg Stock Exchange,have been used for manipulation of markets,and possibly a route for reinvestment of black money.

Round tripping

* Global Depository Receipts are instruments used by firms to raise funds from the overseas capital market

* The Income Tax Department has initiated a study on companies that have issued GDRs over the last five years

* The department feels that almost half of these companies could be front entities employed for round-tripping

* According to sources Luxembourg is emerging as a favoured nation for this exercise after Mauritius and Singapore

* Data available with the Sebi shows that most of the GDR-issuing companies are based out of Luxembourg,Singapore and London

* Round tripping occurs when an investor sends money from one country to another and then routes it back to the original country dressed up as foreign capital

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