The tax department began tightening the noose around shell firms earlier this year, as more details about such companies came to light after demonetisation.
In the new list, tax officials have found that more than 80% of the 2,138 shell firms, which had deposited unaccounted cash of at least Rs 5,000 crore during the note ban, were from Surat. The tax department expects this number to go up.
This list featured 5,800 shell companies, shortlisted by the finance ministry, which had deposits of Rs 17,000 crore in near zero-balance accounts after demonetisation and nearly an equal amount of withdrawal thereafter. Earlier, the tax department had identified 16,000 shell firms floated in Kolkata between 2011 and 2015, to launder money.
The probe further revealed that Surat had become a safer bet for shell firms compared with Kolkata for two main reasons. First, Surat’s diamond business has also resulted in a flourishing parallel trade, with traders shipping diamonds worth millions of dollars illegally abroad, mostly to Dubai and South Asian countries, from where they can be sold to western markets. Since the system was in place and operators were well-versed with the parallel economy, it was easy, explained a senior I-T official.
The second reason is that Surat also has indirect exposure to overseas markets, which is complex and tough to crack.
The earlier modus operandi of converting black money into white was to buy shares of listed shell firms, jack up their prices, sell shares after a year and claim long-term capital gains exemptions.
However, in the new cases, the entities are adopting new strategies to make transactions more complex in nature.
“Surat is known for complex financial structures, which have evolved over the years. There are professional services firms, chartered accountants, and lawyers located both overseas and in India, who help such companies launder money,” said a tax consultant, requesting anonymity.
Under one such scheme, called “layering”, which the Surat operators have mastered, laundering takes place through multiple transactions involving several entities, making it difficult to expose the money trail, the officer pointed out.
In the case of shell companies, assets are seldom in the beneficiary’s name and money moves to jurisdictions where Indian law has no reach. “In the recent past, we have come across a significant number of cases where promoters have parked money in overseas bank accounts with some links with Surat-based firms. The matter is currently under investigation,” said the officer quoted above.
Also, shell companies based in West Bengal have already been prosecuted, said another I-T official. “The continuous crackdown on companies in Kolkata by us is another probable reason for entities avoiding West Bengal to launder money through shell routes,” he added.
Acting on the list, the capital market regulator Securities and Exchange Board of India directed stock exchanges to immediately restrict trading in these firms.
The government decided to crack down on such sham transactions after the Special Investigation Team on black money suggested a mechanism to detect shell companies and put in place checks and balances to curb stock market abuse.
In the last three years, the tax department has identified more than 1,155 shell companies, which were used as conduits by more than 22,000 beneficiaries. The amount involved in non-genuine transactions of such beneficiaries was over Rs 13,300 crore. So far, it has launched criminal prosecution complaints against 47 persons.
This article first appeared on Business Standard.