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I-tax sleuths seek to bust Calcutta's money laundering racket

Arup Chanda in Calcutta

Finance Minister Yashwant Sinha's decision to set up a special cell to probe the black money racket has shook up Calcutta's financial circles.

Gurudas Gasgupta, the Communist Party of India's member of Parliament, had written to Sinha demanding a special cell, comprising officials from the Central Bureau of Investigation, income tax department and company registrar officials, to stop the "trade of legalising black money through the Calcutta channel".

Sinha wrote back, assuring Dasgupta of a probe.

Dasgupta had alleged that some business houses and individuals, who evade tax and amass wealth, legalise black money with the connivance of officials under the Registrar of Companies.

"The inaction of income tax authorities, and their collusion in some cases, has made the job easier for unscrupulous businessmen. Fake investment companies are registered easily as the ROC does not conduct proper inquiries. The firms operate as conduits for channelising black money for fictitious share purchases and for subscribing to the share capital of the companies. The funds so mobilised are given as loans to other fake firms," Dasgupta had alleged in his note.

This well-developed system has come to be known as the Calcutta Channel of Money Laundering.

It began in the early 1980s. Industrialists and businessmen who have huge sums of unaccounted money, incorporate a limited company with investment as one of the main objects. The name of the company does not necessarily imply it is an investment company or a non-residuary investment company.

Once the company is incorporated, they apply to the ROC and SEBI seeking permission for public issue. After all the legal formalities are completed, and once the permission is obtained, they go for the public issue.

According to an income tax official here, the most interesting part in this "racket" is the public issue, as most of the share applicants are bogus. Middlemen (not the legally registered brokers) are appointed to secure such bogus shareholders.

The "brokers" are paid a remuneration of seven per cent of the total amount of subscription they bring.

The owners of the companies dole out their unaccounted funds in cash to these "brokers" who in turn pay it in cash to the share applicants and obtain a cheque of equal amount from them and also get the share application forms signed by them.

This is commonly known as "name lending" in commercial circles. The person who lends his name receives a remuneration of five per cent of the amount for which he subscribes.

IT officials say there are many cases where the "brokers" fill in the share application forms with fictitious names and pocket the five per cent commission. These cases of fictitious shareholders can easily be tracked down.

Thus, there is an amount in the books of the company which has a proper explanation for its source and accounted for, though the money actually belongs to the company's owners.

The next part is to get the company's shares listed with a stock exchange in order to avoid the provisions of Section 104 of the Income Tax Act relating to closely held companies.

Eight months after the shares are listed, the value of the shares are brought down drastically. The value of a Rs 10 share is usually brought down to Rs 2.

Ultimately, the owners of these companies buy shares from the "bogus" shareholders when the value of the shares falls. Thus they again gain control of the company which has in its kitty a huge amount of "white money" as its paid-up share capital.

The loss sustained by the "bogus" shareholders due to the fall in share prices, is beneficial for them. They can claim short-term capital loss, which can be set off against their other incomes, in their income tax returns and thus they too get an opportunity to evade income tax.

Income tax officials recently discovered that a businessman had floated 140 such bogus companies and was maintaining 900 individual income tax files, recording fictitious share purchases.

Mentioning this case before Sinha, Dasgupta alleged that the total transactions in Calcutta alone accounted for more than Rs 10 billion.

Income tax officials pointed out that raids had been conducted on many such companies but without any results. A compact team along with other law enforcement agencies will certainly help bust this racket, they said.

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