Dwelling on the success of demonetization [announced on November 8, 2016], Prime Minister Modi informed the nation from the ramparts of historic Red Fort on August 15, 2017 that the government had cancelled the registration of over 200,000 shell companies [nick name for entities which are engaged in laundering black money]. He reiterated this on October 5, 2017 in his speech at the annual function of the Institute of Company Secretaries of India [ICSI] alluding to the axe falling on another about 100,000 such companies.
The government has followed it up by freezing all their bank accounts [use of the accounts is permitted only for discharge of their liabilities] and initiating action against their directors by disqualifying them from being on the board of other companies. Over 450,000 directors are on the radar of ministry of corporate affairs [MoCA] even as action against 100,000 has already been taken. These companies were identified while examining data on deposits made post-demonetization using advanced data analytics technique.
Taking the process forward – in its all out war against black money and corruption – the government had asked banks to give information on transactions of such suspicious companies whose names were struck off the Register of Companies [RoC] earlier this year. The information supplied by 13 banks makes startling revelations.
A mere 5,800 companies out of 300,000 [200,000 already de-registered and 100,000 on the chopper] were involved in parking off about Rs 4,500 crore of demonetized currency. Majority of them operated multiple bank accounts; several companies had more than 100 accounts. While, one operated as many as 2,134 accounts, two others have as many as 900 and 300 accounts respectively.
The data on pre-demonetization account balances and transactions done from the accounts of these companies during demonetization period is even more startling. After separating the loan accounts, they had a meager balance of Rs 22 crore to their credit on November 8, 2016. However, from the day after announcement of demonetization till the date of their being struck off, they had deposited a huge amount of Rs 4,574 crore in their accounts and withdrew Rs 4,552 crore. With loan accounts, there was a negative opening balance of Rs 80.79 crore as on the date of de-registration.
In case of one bank, over 3,000 such companies had a cumulative balance of about Rs 13 crore as on November 8, 2016. Post-demonetization, they deposited Rs 3,587 crores and withdrew about Rs 3,800 crore, leaving a negative balance of almost Rs 200 crore at the time of freezing. In another bank, 429 companies having zero balance as on November 8, 2016 deposited and withdrew over Rs 11 crore and left it with a cumulative balance of less than Rs 50,000/-.
The value of dubious transactions Rs 4,500 crores pertains to 5800 shell companies out of a total of 300,000. Extrapolating this to remaining companies, unaccounted cash would add up to anywhere near Rs 300,000 crores mark [Modi also mentioned this figure in his August 15, 2017 speech]. Levy of tax and penalty on this would generate much more revenue than this amount thereby alluding to the success of demonetization. But, there is a lot to worry.
The government would have achieved success only if, it actually gets the money in to its coffers. With reference to the aforementioned 5800 shell companies, 4,500 crore of demonetized old currency came to the banks and left. Now, if the owners of this black cash have run away with the money [albeit as new currency], how will the authorities get to it and collect tax and penalty?
Hopefully, these persons left trail viz. names, addresses, phone numbers, PAN etc. What if, none of the information given is correct. Such a possibility is not ruled out as majority of the companies operated multiple /dormant/zero balance accounts. In that case, catching them will be a daunting task, if not impossible. But, the big question is why were they allowed to flee with the cash?
Ideally, banks should have not have accepted the cash in the very first place. If, a person comes with truck loads of currency notes [read: demonetized], by any stretch of imagination, this could not be money needed for genuine requirement of business or savings made possible by his income and expenditure profile. The bank had every reason to hand him over to IT and intelligence agencies.
If, during search and seizure, a person is found in possession of unaccounted cash, he is arrested and prosecution is launched under the relevant acts. But, in this case, the hoarder of black cash himself is coming to the doorsteps of the bank and latter instead of handing him over to the police welcomes him, deposits the money into his account and may even have given some interest income.
This was a serious lapse which is unconscionable and unpardonable. Even worse, after the money had come within total control and jurisdiction of the bank, it allowed this to be withdrawn. That the money was being laundered should have been clear to the banks from day one. The government had given them clear guidelines restricting withdrawals. Then, how come they allowed money launderers to drive away with thousands of crores?
The results of scrutinizing remaining 294,200 cases will take some time to come in. What if in those cases also, the banks had allowed hoarders to run away with the cash; that would be very unfortunate. True, the investigation agencies will chase and hopefully get them to pay tax plus penalty. But, this would tantamount to ‘bolting the stable after horses have fled’!
Demonetization being a reform on which Modi has put his personal reputation at stake, the government cannot afford to remain complacent. Three things need to be done on an urgent basis.
First, banks must be directed to complete scrutiny of all suspicious transaction within a given deadline say, three months. Till this is done, no withdrawal from the account/accounts should be permitted. Second, in case where the money fled, agencies should go for a witch-hunt and get it back. Third, strict action must be taken against bank officials who colluded with hoarders.
Prime Minister should go in a mission mode to ‘DELIVER’ or else critics will have a heyday debunking this path breaking structural reform as something that did not serve its intended purpose.