Are NBFCs our own Swiss banks?

There are many in India — the chattering class and the cognoscenti — who vent their anger at the unaccounted money salted away in Swiss and other banks.

They rail at the secrecy enjoyed by depositors, as well as against the impotency of the Government in establishing the money trail and demanding the money back from the banks in these countries.

But there is also a growing feeling that the Government should focus more on the low-hanging fruit — the black money brazenly deposited with an assortment of non-banking finance companies (NBFCs) and cooperative banks within the country itself, smug in the knowledge that the long-arm of the law can never reach out to it.

These institutions are lax in enforcing Know Your Customer (KYC) norms. The absence of a strict regulatory oversight on a par with one obtaining for nationalised banks gives them as well as their depositors freedom from questions on the source of funds.

The tussle between the market regulator, Securities and Exchange Board of India (SEBI), and Sahara has its origins in the alleged dubious deposits. Information emanating from the SEBI gives one the unmistakable impression that a chunk of deposits has been made from non-existent addresses, reinforcing the inference that they are benami.

REAL ESTATE LAW

The Income-tax Act, 1961 till the year 2001, enabled the Department to make preemptive purchases of immovable properties beyond a specified threshold level, that differed from city to city, if it suspected understatement of actual consideration with a view to avoiding capital gains tax. In Delhi, for example, the threshold limit was Rs 75 lakh.

Anyone wanting to sell his property at a stated consideration of, say, Rs 80 lakh had to notify the competent authority of his intention. If the Department got a whiff that the actual consideration was Rs 1.30 crore, with Rs 50 lakh changing hands in cash, it could stump the seller by handing him a cheque for Rs 80 lakh.

The effect was either that the purchaser lost Rs 50 lakh, if he had already paid it through dubious means, or that the seller had to meekly make do with Rs 80 lakh.

The scheme registered a modicum of success while it lasted, but its sudden abortion on the ground that the department was burdened and saddled with unsold properties in a weak market did not cut ice with those in the know.

Whatever the reasons for its discontinuance, the scheme did send a chill down the spines of people in the real-estate market.

IMPOUNDING DEPOSITS

Can something similar be replicated with deposits? There is no reason why the Government should not be armed with powers to notify institutions alleged to be giving a safe sanctuary to black money.

It can ask them to hand over deposits on maturity to an arm of the government. The depositors to whom the money is repayable should prove their identity and source of funds at the time of redemption.

If the institutions concerned are lax in preventing money laundering while inviting deposits, there is nothing wrong in setting into motion a machinery to identify such money at the time of its redemption.

A one-size-fits-all approach, of course, is neither possible nor warranted. Therefore, there may be a cut-off point, as was the case with preemptive purchases of immovable properties under the income-tax law, with a rider that suitable auditing software be put to use to lump together deposits placed in the names of dubious individuals.

The money trapped, so to speak, by the Government from these institutions can be the trigger for a detailed investigation into the generation of black money.

If the dispensation in place has failed to nab black money at the point of entry, there is nothing wrong in nabbing it at the point of exit. Those unable to prove their identity or source will have the mortification of losing the deposits to the government.

ENFORCEMENT ISSUES

The Benami Transactions Prohibition Act, 1988, which has been scrapped now on the promise of introducing a vastly improved law on the issue of benami properties contemplated something similar — all benami properties would be confiscated by the Government. That was a brilliant statement but the one that begged the question —how to identify a benami property in the first place?

The regime suggested herein with regard to deposits addresses the issue in a pragmatic way by placing the onus on the deposit holder. The problem with the aborted benami law was it was excellent in intent, but clueless in terms of enforcement detail.

The proposed regime on deposits would not suffer from this infirmity. Can honest depositors be caught in the crossfire?

That will not happen, because they would be able to identify themselves, besides being able to explain the source. There must be a fast-track window to dispose of their cases.

(The author is a New Delhi-based chartered accountant.)