Indian tax evaders pulling out Swiss stash to invest at home

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By Shantanu Guha Ray and Lalatendu Mishra

Illustration: Naorem Ashish

SHAKEN BY the Swiss government’s recent announcement that it would reveal the names and account details of Indians who have stashed away an estimated $1.4 trillion ( Rs.62 lakh crore) in Swiss banks, the tax evaders are rushing the greenbacks back home. The Swiss are only waiting for the Indian Parliament to ratify the revised Double Taxation Avoidance Agreement (DTAA) that the two countries signed in August. The revised treaty is also likely to ensure that henceforth global shipping companies will be required to pay tax on their profits only in their country of domicile. Currently, though India has DTAAs with 79 countries, not all of them have provision for exchanging taxation-related information.

Most of the money is being funnelled through the Participatory Note (PN) route and opening of sub-accounts with foreign institutional investors (FIIs).

“Such is the rush to route back the greenbacks that the Swiss banks have now started (levying) new charges in a bid to retain the funds, thus forcing clients to look for safer avenues to bring the cash home,” says top lawyer Ram Jethmalani who, for over a decade, has been exhorting New Delhi to put in place regulations that would force Swiss banks to disclose the account details.

Highly placed sources in New Delhi and Mumbai say much of the money held in Swiss banks, and other tax havens like the Bahamas, have been routed into the Indian stock exchanges through PNs bought in Mauritius through front companies. Since these instruments are not registered to trade in Indian domestic capital markets, the investors’ names remain undisclosed. “The route to take out the money is hawala and to bring it back is PN,” says Hemen Kapadia, one of Mumbai’s top stock market analysts. The sources told TEHELKA that roughly 50-60 percent of FII investments, aggregating $85 billion till late 2009, were made through the PN route. And according to Kapadia, this route saw 75 percent traffic in the last few months. A worried market regulator, the Securities and Exchange Board of India (SEBI) is now learnt to have asked several FIIs to furnish details of the PNs issued to their clients, but it has been consistently stonewalled. “They will always win by citing client confidentiality agreements, and I doubt whether SEBI has the necessary legal teeth to probe further,” Kapadia points out.

FII investment in Indian stocks this year touched a record $18.13 billion ( Rs.82,360 crore), according to the SEBI website. In dollar terms the previous high was in 2007 ($17.65 billion) and in rupee terms in 2009. Stock market analysts say FII investment in rupee terms is lower because of appreciation in the Indian currency against the dollar. The Sensex last year gained over 80 percent — a figure it is likely to surpass this year.

Not taking into account the recently concluded Coal India IPO, the FII bids amounted to Rs. 1.20 lakh crore. Some foreign entities that have placed large bids for Coal India through PNs include Citibank ($1 billion), Merrill Lynch ($2 billion) and Deutsche Bank ($3 billion). The Qualified Institutional Buyer (QIB) quota in the Coal India IPO that was oversubscribed 24 times was primarily due to intense FII interest.

Brokers say the money coming through the sub-accounts opened by FIIs is being invested in Indian companies through the acquisition of stakes, buying of shares in the stock market and being pumped into real estate. Actually, considering the transparency in the stock market and the disclosure levels, analysts feel that most of the money is now flowing into the real estate sector, which is often opaque. “This would further overheat the realty market across the country,” says Ashish Chadha, a real estate analyst.

“The FIIs have so far made a net buy of shares worth $18 billion and the inflow will not stop. The SEBI needs to keep a check,” said a top Reserve Bank of India official on telephone. Requesting anonymity, he said the RBI had repeatedly urged the government to ban PNs, as the nature of the beneficial ownership or the identity of the investor remains unknown. “Trading of these PNs could lead to multi-layering. As a result, no one, virtually no one, can identify the ultimate holder of PNs,” the official informed, adding that it was precisely this fear that prompted the RBI to raise the issue of narco-money finding its way into the Indian markets through the PN route. In fact, in 2007, when the then National Security Adviser MK Narayanan had spoken of terror funds routinely penetrating and manipulating the markets, he was hinting at PNs. Earlier, the RBI too had come out with a report expressing concern over the illegal traffic. At that time 89 percent of the funds invested by FIIs had come through the PN route, RBI data showed.

“It means the person is hiding the source of funds and routing money through FIIs that are more than happy to take them on board. The PN route is always fishy,” explained a fund manager at a large Indian financial institution. “That almost all FIIs are running sub-accounts for dubious clients is well known in the industry. And in the past few months this activity has gained momentum, though there indeed is a genuine rush of FIIs to invest in India,” said a source working in the mutual funds industry.

VETERAN MUMBAI brokers say the SEBI, the ED, the Income-Tax Department — and even the RBI — have been repeatedly informed about the three categories of people that have been trying to funnel in the money through the FII channel. “These are politicians, bureaucrats and businessmen. The businessmen are the more sanitised of the lot and well positioned to repatriate their ill-gotten funds. But the other two depend heavily on the FIIs — yet no action was taken,” complained one senior broker.

The trouble is that unlike the stringent Know Your Customer (KYC) norm that applies to domestic investors, the KYC norms for PNs are criminally lax. “Those pushing their illegal wealth back into India are taking huge advantage of this and using PNs as a potent tool,” says SP Tulsian, a top stock market analyst, adding that both SEBI and RBI needed to push for stricter norms. The large-scale withdrawals from Swiss banks have sent alarm bells ringing in the finance and home ministries, and the Intelligence Bureau (IB) too is reported to have stepped up its monitoring.

As for the Swiss government, it could soon push its banks to exchange information related to the tax evaders’ bank account details, as per norms set by the Paris-based Organisation for Economic Cooperation and Development. The move is believed to have been prompted by intense pressure from G-20 nations. “This is worrying many Indians who have money stashed away in those banks,” says Jethmalani, adding: “So they are taking out their money and, for the time being at least, investing heavily in the market.”

Alarm call Politician-lawyer Ram Jethmalani is one of the many to object to the PN route
Alarm call Politician-lawyer Ram Jethmalani is one of the many to object to the PN route
Photo: Lakshman Anand

And this has been happening in Pakistan as well, ever since the Swiss Parliament’s historic move to pass the Return of Illicit Assets Act (RIAA). There, too, the tax evaders have started transferring billions of dollars from their Swiss bank accounts to secret destinations in Europe and Asia. According to recent estimates, roughly $200 billion — four times the external debt of Pakistan — is stashed away in Swiss banks and is now being withdrawn. Top sources in Lahore say they have evidence that Pakistanis are moving their black money to two destinations — London and Islamabad — via PN, and opening sub-accounts with FIIs. “Our problems are similar. They are making everything above board, everything official,” said Ali Mohammed, a broker at the Karachi Stock Exchange.

Earlier this month, Christa Markwalder, president, Foreign Affairs Committee (Presidentin Aussenpolitische Kommission des National Rats) of the Swiss Parliament told Tarun Vijay, MP and national spokesperson of the Bharatiya Janata Party, that she had recently explained to Finance Minister Pranab Mukherjee about how the matter could be resolved to India’s satisfaction. Incidentally, Vijay was the first to directly contact the Swiss government in this regard. But Jethmalani feels India is not pressing the Swiss hard enough. “Soon, there will be a crash of an unusual nature in the markets — because even if the Swiss government is keen, the Indian government does not seem to be keen to push the agenda,” says Jethmalani.

There are others, too, who feel New Delhi can, if it wants, stem the tide. R Vaidyanathan, a professor of finance at the Indian Institute of Management (IIM), Bangalore, says the Swiss banks need specific names and will never work on any random calls. “India needs to do some exhaustive work like the US government did to get names out of UBS.

“That is not happening. Even in the case of Pune’s Hassan Ali, the papers were returned because the Indian agencies had submitted forged documents,” says Vaidyanathan. In his view, everyone is hiding under the cover of the ‘great India growth’ story: “They are saying the investments are happening because there are enough positive signals for India. The Indian economy has bottomed out and is set for positive growth in 2010.”

India is not pressuring the Swiss banks enough to reveal the details of the money stashed in them

Experts say that if the Swiss money had returned to India via a legitimate route, almost every Indian family would have got Rs. 2.5 lakh. The national debt would have been liquidated and people would have received a tax-free budget for the next three decades.

Says Chennai-based chartered accountant TN Manoharan of Manohar Chowdhry & Associates, a member on Mahindra Satyam’s re-constituted board: “India must give preference to FDI, rather than short-term hot money that comes into play in the markets. Long-term funds have a lock-in period but the short-term hot money can play the market for merely a day and then exit electronically.”

Everyone agrees. But who will take the next crucial step?

With inputs from Qwasar Abbas in Karachi

shantanu.guharay@fwtehelka.com
lalatendu.mishra@fwtehelka.com

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