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SIT on black money: Identify beneficial ownership of Participatory Notes

Seeking to check rampant black money, the Supreme Court-appointed Special Investigation Team (SIT) has recommended tough laws to curb betting in cricket, monitoring unusual rise in stock prices, regulating Participatory Notes (P-Notes), and bring donations to education and religious bodies under tax net.

The SIT, which will be headed by ex-Supreme Court judge MB Shah, has called on the Securities & Exchange Board of India (SEBI) to come up with regulations so that the "final beneficial owner" of P-Notes and overseas derivative instruments (ODI) are known.

The SIT said that this knowledge should be at the level of the individual and not the company because of large inflows though these instruments.

A P-Note is a derivative instrument issued in foreign jurisdictions by a foreign institutional investor (FII) against underlying Indian securities.

The committee said that the information of 'beneficial owner' with SEBI must be in form of individual whose KYC (know your customer) information is known to SEBI. In no case should the KYC information end with name of a company.

The report, which has been submitted by the panel to the government, has also suggested restrictions on cash transactions above a particular threshold and putting in place a limit of "may be Rs 10 lakh or Rs 15 lakh" on cash holding to control unaccounted money.

P-Notes are used for investment into India by investors who do not want to follow the rigorous disclosures. There has been concern about round-tripping of Indian money in the past. Recently, the regulatory regime appears to have settled down.

Outstanding offshore derivatives added up to Rs 2.715 lakh crore at the end of February 2015 with Cayman Islands, the US, UK, Mauritius and Bermuda contributing to 31.31 percent, 14.20 percent, 13.49 percent, 9.91 percent and 9.10 percent, respectively, according to SEBI data.

Since P-Notes are transferable it is difficult to track the eventual beneficiary, the committee said. The committee further added that SEBI should examine if this provision of allowing transferring of P-Notes is in any way beneficial for easing foreign investment.

According to SIT, the lack of long-term capital gains tax on profits made on sale of shares is subject to extensive misuse for laundering black money. The committee has called for an effective monitoring mechanism to study unusual rise in stock prices and follow-up action after that.

The SIT expressed concern over trade-based money laundering through mispricing of exports and imports, which is a major means of taking money out of the country.