The following article takes a peep into some of the fraudulent ways Black Money is converted to White Money
1] Converting black money into white – Incorporating the so called ‘capital gains company’
The mechanism takes advantage of the fact that long term capital gains on share purchase transactions (gains on shares held for over year) are tax exempt.
To explain the mechanism, with an example:
Pool A: many investors pool in their unaccounted money;
Pool B: at the same time, a group of investors with white (tax paid) money come together (or rather, they are arranged together by an intermediary);
Once the company is listed, the first group of people to buy stocks are those who want to convert black money into white. The money they use does not come from pool A. In fact, they use a small portion of their white money to buy shares at the listing price (say Rs. 10 for each share).
Once, investors from Pool A take positions (i.e. buy shares at the listing price), investors from pool B start buying thus inflating the stock price. At the same time they receive the unaccounted money from Pool A. While in practice they buy with the pool A cash, in accounts, they take a loss in their books and their (tax paid) white money disappears. Effectively they are buying with their white money to inflate the price of a listed stock and are receiving black money in return. To do this they are compensated a few percentage points of premium. For example, if they convert their white money worth Rs. 1 Cr., they will get black money to the tune of Rs. 1.05 Cr.
After 1 year from the date of initial purchase made by Pool A investors (to ensure the benefit of tax free long term capital gain) – as the stock price rises investors from Pool A start selling their holdings and investors from Pool B suffer huge losses (only on the screen). In return they have received the Pool A money, greater than the loss they suffer on the screen.
Eventually, the entire lot of Pool A investors cash out and the stock price collapses.
So when you see unheard of companies which show extraordinary performance without any improvement in fundamentals, or companies that continuously hit upper (or lower) circuits, chances are that you are looking at a manipulated stock.
1] Converting black money into white – Incorporating the so called ‘capital gains company’
The mechanism takes advantage of the fact that long term capital gains on share purchase transactions (gains on shares held for over year) are tax exempt.
To explain the mechanism, with an example:
Pool A: many investors pool in their unaccounted money;
Pool B: at the same time, a group of investors with white (tax paid) money come together (or rather, they are arranged together by an intermediary);
Once the company is listed, the first group of people to buy stocks are those who want to convert black money into white. The money they use does not come from pool A. In fact, they use a small portion of their white money to buy shares at the listing price (say Rs. 10 for each share).
Once, investors from Pool A take positions (i.e. buy shares at the listing price), investors from pool B start buying thus inflating the stock price. At the same time they receive the unaccounted money from Pool A. While in practice they buy with the pool A cash, in accounts, they take a loss in their books and their (tax paid) white money disappears. Effectively they are buying with their white money to inflate the price of a listed stock and are receiving black money in return. To do this they are compensated a few percentage points of premium. For example, if they convert their white money worth Rs. 1 Cr., they will get black money to the tune of Rs. 1.05 Cr.
After 1 year from the date of initial purchase made by Pool A investors (to ensure the benefit of tax free long term capital gain) – as the stock price rises investors from Pool A start selling their holdings and investors from Pool B suffer huge losses (only on the screen). In return they have received the Pool A money, greater than the loss they suffer on the screen.
Eventually, the entire lot of Pool A investors cash out and the stock price collapses.
So when you see unheard of companies which show extraordinary performance without any improvement in fundamentals, or companies that continuously hit upper (or lower) circuits, chances are that you are looking at a manipulated stock.
2] Trading in a third party account
Typically an intermediary (typically a stock broker or an authorized person) opens an account for the investor in a third person’s name. Usually a company or for smaller accounts – in another individuals name, who falls below the taxable limit for income. This account is then funded with the investor’s money. The investor can trade in this account via call and trade facility or even using online banking and trading facility. Basically, it is no different than giving the investor access to another person’s trading /bank account which is funded 100% by the investor’s money.
When the investor wishes to withdraw his investments, he instructs the intermediary who gets a small percentage of commission to facilitate the whole system. In a lot of cases, the intermediaries end up even managing such money, this could at best be described as a ‘black portfolio management service’. It’s rampant to say the least.
Typically an intermediary (typically a stock broker or an authorized person) opens an account for the investor in a third person’s name. Usually a company or for smaller accounts – in another individuals name, who falls below the taxable limit for income. This account is then funded with the investor’s money. The investor can trade in this account via call and trade facility or even using online banking and trading facility. Basically, it is no different than giving the investor access to another person’s trading /bank account which is funded 100% by the investor’s money.
When the investor wishes to withdraw his investments, he instructs the intermediary who gets a small percentage of commission to facilitate the whole system. In a lot of cases, the intermediaries end up even managing such money, this could at best be described as a ‘black portfolio management service’. It’s rampant to say the least.
3] Silver Utensils
Go to a Jeweler. Give him the amount you want to convert into white as cash. he would give you a cheque back for the same amount less 4%. He would give you a purchase bill to show that you have sold silver utensils to him. On the amount of the cheque when you file your return you will have to pay no capital gain tax as Silver utensils are Personal effects and capital gain does not arise on sale of personal effects. There you go , the money is white now!!!
4] Insurance Premiums:
Another popular way of converting black into white money is showing income in cash like tuition income or any other professional fees.Just pay the tax at normal rate and your money is white now!!!!
Also people make investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example your insurance premium is 25000/- per annum and you can pay 6000 in check (shown in books) and remaining in cash, people increasing the proportion of premium paid in cash increasing as and pay entire premium in white for last two years before maturity. No ITO is going to check premium of more then last two years and it is a small example. People are paying huge cash premiums everyday. In case of this small premium, the cost of investigation exceeds the benefit to the exchequer so the ITO will give a test check for at the max last two years.
Also people make investment where it is allowed to invest in cash and where the maturity is tax free for example buying an insurance policy where you are not required to show all your premiums and the maturity is tax free. For example your insurance premium is 25000/- per annum and you can pay 6000 in check (shown in books) and remaining in cash, people increasing the proportion of premium paid in cash increasing as and pay entire premium in white for last two years before maturity. No ITO is going to check premium of more then last two years and it is a small example. People are paying huge cash premiums everyday. In case of this small premium, the cost of investigation exceeds the benefit to the exchequer so the ITO will give a test check for at the max last two years.
