Recent events such as the Supreme Court forcing the Government to divulge the list of Swiss account-holders and the Prime Minister’s grandstanding that he intends to bring back every penny of black money is whipping up emotions, and calls to bring back the money stashed overseas are getting louder.

The ire against black money is justified as this is money that has evaded tax or was obtained in an illegal manner or is attempting to escape from a legitimate transfer to another entity. While some money that was taken overseas is still locked away in the secret Swiss vaults or other overseas assets, a large chunk of the money has already come back to the country through a process called round-tripping.

What is it?

The term ‘round-tripping’ is self-explanatory. It denotes a trip where a person or thing returns to the place from where the journey began. In the context of black money, it leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on. After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.

This route is far from simple or straightforward. Those indulging in this game are past masters who make the money flow through multiple layers consisting of many entities and companies.

How does the money return to India? It could be invested in offshore funds that in turn invest in Indian assets. The Global Depository Receipts (GDR) and Participatory Notes (P-Notes) are some of the other routes that have been used in the past.

Why is it important?

We need to take note of such fund movement since many listed companies appear to be involved in these activities. SEBI had recently issued a notice against listed firms including United Spirits, GMR, Unitech and Sterlite for investing in group companies through a foreign account held with UBS. The companies are alleged to have indulged in stock price manipulation and insider trading through this route.

Another high-profile case in 2009 involved the Reliance ADAG group that was alleged to have manipulated the shares of Reliance Communication through a multi-layered transaction involving shell companies, P-Notes and prominent international investment banks.

Why should I care?

If a company is under the regulator’s radar for round-tripping allegations, it implies the possibility of poor corporate governance. You might want to think twice about putting your money into such stocks.

A chunk of the foreign portfolio funds that flows in to stock markets is purported to be dressed-up black money. If a witch-hunt for black money and its sources ensues, it does not bode well for the ongoing rally, as much of it is driven by the liquidity generated from foreign portfolio investors.

The bottomline

It is alright to root for those trying to bring the black money back. The exchequer stands to gain by the tax that can finally be levied on this money and it might deter others who might be hatching similar plans.

But in a lighter vein, the Government should perhaps encourage round-tripping; that appears to be a far easier way to get the money back. And it can save us from the rhetoric.

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