Closing the P-note window will make NDA moves on black money credible

Governments are scared of stock market crashes. Reason: it is like a formal thumbs down to their policies, while also making tougher to raise money through disinvestments. This is why they have always been pussyfooting around the issue of clampdown on participatory notes (P-notes), those derivative instruments that make it possible for foreign inflows into Indian stocks to remain anonymous.

Well, it is time to take the bull by the horns. A few months of a stock market crash should be a small price to pay for a government that has set great store by its promise of going after black money abroad. The NDA should thus accept with alacrity the Supreme Court-monitored Special Investigation Team's suggestion that participatory notes should be made completely transparent.

 Closing  the P-note window will make NDA moves on black money credible


While the SIT's message is directed towards market watchdog Sebi which regulates P-notes, it is no secret that any serious clampdown will need a political nod, given the sheer volume of investments coming in through this route. Any move on P-notes which forces foreign portfolio investors (FIIs) to disclose the identities of the real beneficial investorw will kill off all non-bonafide inflows, a chunk of which could be black money.

At last count, Rs 2.75 lakh crore came in through P-notes, around 11.5 percent of the total assets held by foreign portfolio investors.

P-notes are an open encouragement to black money for they actually reward owners of illegal, tax-evaded held money abroad.

Any illegal money held abroad has possibly already evaded two Indian taxes: income and customs duty (though the latter case is arguable, especially if imports are overinvoiced and higher duties are paid in order to create a nest-egg abroad). An underinvoiced export would certainly have evaded taxes twice over, as lower reported income means lower taxes here. Plus there is the money held abroad that earns income in a different, and presumably lower-taxed jurisdiction.

This is where P-notes worsen the extent of evasion. P-notes encourage illegal money to make further gains from speculating or investing in Indian stocks, which increases the amount of illegal wealth held by Indians abroad. At the very least, illegal wealth abroad evades taxes twice, and at worst thrice, thanks to P-notes. And we are not talking of the recurrent income over many years here.

It is foolish of any Indian government to actively reward illegal assets abroad while at the same time legislating harsh laws to penalise such holdings, as the NDA government has tried to do with the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

The disclosure window for assets under the new law ends on 30 September and it is possible that closing the P-note window now will aid further disclosures, though I would not bet on it. Actual disclosures depend on whether black money holders believe they can get away without disclosing anything. To work, the black money law will need to demonstrate the government's willingness to go doggedly after black money, something no government has ever done, given that most elections are funded with black money.

If the NDA government truly believes is going after black money, it should direct Sebi to close the P-note window for unidentified beneficiaries. At the very least there are political gains to be made from showing a tough stance against black money that is not mere posturing.

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Updated Date: Jul 27, 2015 13:20:44 IST