‘Stop allowing participatory notes’

PRASHANT BHUSHAN, lawyer, activist and Aam Aadmi Party leader, has been a persistent critic of corporate malpractices and is involved in a number of public interest cases challenging the same. In this interview to Frontline , he spoke about the limitations of an SIT (Special Investigation Team), loopholes in the regulatory mechanism, and the lack of transparency in the functioning of investigating authorities. Excerpts:

Is the BJP government's step to finally appoint an SIT a decisive step to bring back black money?

The government had no option but to constitute the SIT as per the orders of the apex court. The UPA government kept on delaying the process and filed a review petition in the Supreme Court too. Following the dismissal of the review petition, the government had an obligation to form the SIT.

What measures need to be taken to prevent unlawful activities that generate unaccounted money?

We need to understand the regime that is in place at present which allows for easy laundering of money. There are three kinds of illegal money. Firstly, there is money generated out of corruption and crime. Secondly, there is money siphoned out of corporations which also leads to cheating the government and the shareholders. The third category includes tax evaded money. The tax payable in India is evaded and the money is send out to tax havens. There are several ways in which money-laundering and round-tripping has been made easy. One of this is by allowing investments into India from tax havens.

Also, the signing of treaties such as the Double Taxation Avoidance Agreement with Mauritius has facilitated tax evasion. Treaties such as this one allow you to bring in money without disclosing your identity and also to evade taxes through post-box companies that are not taxed. Almost half of India’s FDI (foreign direct investment) comes from off-shore companies registered in Mauritius. Any income generated from money coming in through this route remains untaxed.

Secondly, the government, by allowing participatory notes to operate, has made it possible for owners of funds to remain anonymous. [Participatory notes are financial instruments used by investors who are not registered with the Securities and Exchange Board of India to invest in Indian stock markets. They are issued to the investors by registered foreign institutional investors who are allowed to invest in Indian stock markets. Any dividends or capital gains earned from the securities go back to the unregistered investors. Regulators have no way of identifying the underlying securities, which makes it an easy route for money laundering.]

Thus, the regulatory regime has allowed money to be laundered as well as invested indirectly through shell companies. To rein in these malpractices, we will have to stop allowing participatory notes. Also, a law needs to be passed [making it necessary] to disclose the owners of funds.

The details of the owners of all companies which are investing needs to be disclosed. An amendment is required to be made to the Prevention of Money Laundering Act to ensure that every citizen will have to disclose all the details of his assets held abroad as well as his direct or indirect shareholding in any foreign company.

The functioning of institutions such as the Income Tax Department and the Enforcement Directorate is also under the scanner as they take a long time to investigate?

There is political interference in the functioning of these agencies. The influence of political circles and corporates ensures that the investigations are not fair. We [the Aam Aadmi Party] had proposed a powerful anti-corruption law in the form of a Jan Lokpal which would ensure transparency in the functioning of the investigating agencies and time-bound investigation.

How successful have court-ordered investigations been so far?

Court-ordered investigations are more credible than the others carried out by investigating agencies. But they are still not perfect as the court does not itself look into the details of the investigation. For example, in the coal allocation scam, the investigations have not worked too well.

Will the OECD treaty on automatic information exchange prove to be a successful step towards combating tax evasion?

International conventions against corruption are useful in putting pressure on tax havens. India can and should be using these conventions to bring back the money stashed abroad.