Black and white money trail: How shell companies help this thriving business

There are a few things that we very well know exist and still would not speak about, only because they have become part and parcel of our everyday life. The story of black money in India is one such and Sunday's ET Magazine has an investigative report on this.

The report is about shell companies set up across the country that do broking services to turn white money of Indian companies and politicians into black and vice versa. While the existence of such shell companies may be widely known, the report has graphic details of how they function. There are also a few unconfirmed interesting facts about Pawan Kumar Ruia, a Kolkata-based industrialist often referred to as takeover tycoon.

According to the report, infrastructure companies, which need large amounts of cash to pay off bribes to everybody from local politicians to naxalites, are the ones that mostly enter into such deals. They sign a cheque to one such shell company, and this is accounted as payment or commission. This company returns the money in cash, which the infra company uses to pay bribes. Thus white is converted into black.

Now, the shell company shows that this money is paid off to a few other shell companies as payments towards contractual fulfillment. Interestingly, all these transactions are only on paper. They never take place in reality. These shell companies are also ready for takeovers by other companies, which want to turn black money into white. For this, these shell companies are bought at huge discount, say at Re 1 per share, while the book value is Rs 50 per share.

The only catch here is that the buyer of such a company has to bring in the black money in small deposits since any amount above Rs 49,000 needs PAN. This is much similar to a real estate deal involving black and white components. Thus the shell company has the role of an intermediary, a broker who helps turn black into white and back.


Representational Image. Reuters

And it is in the last leg of the transaction that banks come into the picture. In other words, the recent Cobrapost expose was just the tip of a very large iceberg.

A typical case in point is a company called Ganga Builders, which attracted attention because of its connections with controversial Andhra Pradesh politician Jagan Mohan Reddy. Floated in 1982, nothing is known about the company, the report says. On 14 February, 2008, as many 18 companies invested in Ganga Builders, which by and large went unnoticed. But another investment that happened on the same day caught the tax authorities' attention. This involved Jagan Reddy's Jagathi Publication, which saw 17 companies investing about Rs 121 crore. And the interesting fact is that most of the investors in Ganga and Jagathi are same. According to ET, the reporter, who went on Ganga Builders' trail in Kolkata, could not spot any office in its address.

Kolkata is a paradise of such shell companies. It is interesting to note the number of new companies registered with address in West Bengal, a state considered largely industry unfriendly, is comparable with that in the most industry friendly states such as Maharashtra and New Delhi, says the report.

The jamakharchi business, as this broking service is called locally, thrives here because of the presence of a large number of chartered accountants who do not earn enough for a decent living.

"Kolkata has always been a hub for CAs, but with the industrial decline of the city, there is less work and many CAs have de facto entered this business," an IT official has been quoted as saying in the report.

And one among them who made it big in the Indian industry later is Pawan kumar Ruia, says the report. "Mr Ruia took up activity in the eighties and by now (by 2004) he has floated hundreds of companies. The purpose of floating these companies was to meet the demand of those beneficiaries who wanted to buy some readymade companies. These companies were sold to different beneficiaries as commodity for a lump sum amount...," the report quotes from excerpts of a 2004 Income Tax Appellate Tribunal (ITAT) order. The company, however, did not offer any comment.

The black money economy that the report exposes is again only a minor part of a big ugly story.

In April, a report in the Business Standard had said that in mergers acquisitions, making secret payments to Swiss accounts are a routine in India. This essentially helps promoters sidestep the Sebi and tax authorities in India, the report said citing a Wikileaks cable.

As Cobrapost exposed earlier, the India story is essentially black. We, the blind people, feel the tail and leg, and conclude that is what the black money trail is all about and miss the mammoth black economy that thrives with much help from the politicians and companies.

Read the entire ET report here.

Updated Date: Dec 20, 2014 20:32 PM

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