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Black and White Money Trail: How Shell Companies help this?

CA Bhavik Mehta 
on 18 March 2014

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Black and white money trail: How shell companies help this thriving business

There are a few things that we very well know exist and still would not speak about, only because they have become part and parcel of our everyday life.

Today we will talk about shell companies set up across the country that do broking services to turn white money of Indian companies and politicians into black and vice versa. While the existence of such shell companies may be widely known, nobody will speak about it.

Infrastructure companies, which need large amounts of cash to pay off bribes to everybody from local politicians to naxalites, are the ones that mostly enter into such deals. They sign a cheque to one such shell company, and this is accounted as payment or commission. This company returns the money in cash, which the infra company uses to pay bribes. Thus white is converted into black.

Now, the shell company shows that this money is paid off to a few other shell companies as payments towards contractual fulfillment. Interestingly, all these transactions are only on paper. They never take place in reality.

These shell companies are also ready for takeovers by other companies, which want to turn black money into white. For this, these shell companies are bought at huge discount, say at Re 2 per share, while the book value is Rs 100 per share. The only catch here is that the buyer of such a company has to bring in the black money in small deposits since any amount above Rs 49,000 needs PAN. This is much similar to a real estate deal involving black and white components. Thus the shell company has the role of an intermediary, a broker who helps turn black into white and back.

A typical case in point is a company called Ganga Builders, which attracted attention because of its connections with controversial Andhra Pradesh politician Floated in 1982, nothing is known about the company, the study says. On 14 February, 2008, as many 18 companies invested in Ganga Builders, which by and large went unnoticed. But another investment that happened on the same day caught the tax authorities’ attention. This involved Jagan Reddy’s Jagathi Publication, which saw 17 companies investing about Rs 121crore. And the interesting fact is that most of the investors in Ganga and Jagathi are same.

Kolkata is a paradise of such shell companies. It is interesting to note the number of new companies registered with address in West Bengal, a state considered largely industry unfriendly, is comparable with that in the most industry friendly states such as Gujarat and Maharashtra.

The jamakharchi business, as this broking service is called locally, thrives here because of the presence of a large number of agents who o not earn enough for a decent living.

The black money economy mentioned over here is again only a minor part of a big ugly story. In April, a report in the Business Standard had said that in mergers acquisitions, making secret payments to Swiss accounts are a routine in India. This essentially helps promoters sidestep the SEBI and tax authorities in India, the report said citing a wikileaks cable.

As Cobrapost exposed earlier, the India story is essentially black. We, the blind people, feel the tail and leg, and conclude that is what the black money trail is all about and miss the mammoth black economy that thrives with much help from the politicians and companies.

Any sought of queries or suggestions are most welcome. Feel free to contact me @ bmmehta89@gmail.com

CA BHAVIK M. MEHTA

B.Com, ACA, CS, DISA (ICAI)

Bhavik Mehta & Co.

Chartered Accountants

City-Bhuj

Gujarat-India


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