India: Money‐Laundering Alert
| DOI | https://doi.org/10.1108/eb027249 |
| Date | 01 February 2000 |
| Pages | 351-353 |
| Published date | 01 February 2000 |
| Author | B.V. Kumar |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 3 No. 4
COUNTRY PROFILES
India: Money-Laundering Alert
B. V. Kumar
The Bombay Stock Exchange (BSE) blew the whistle
in respect of 20 companies who changed their names
to suggest a shift in their focus to software-related
activities from their core business (mostly financial
activities), in 1999.
In addition to this list of 20 companies, which was
announced on 27th January, 1999, 23 more com-
panies were added on 14th December, 1999. A BSE
spokesperson stated that 'the names of the companies
are being announced to warn investors against such
companies'. (See Table 1.)
1999 was a dream year for every investor who pur-
chased stocks of software companies set up in India.
The value of software scrips rose several hundred
times within one year (eg shares having a face value
of Rs. 10 of Infosys Technologies Ltd, a blue-chip
company, are being quoted around Rs. 16,932;
shares having a face value of Rs. 10 of Wipro Ltd
are being quoted at Rs. 3,183).
The Securities and Exchange Board of India (SEBI)
and the BSE had to intervene several times in the
recent past to check the volatility of the stock
market. The BSE took this unusual step bearing in
mind the increasing volumes being traded and the
soaring prices of the software stocks. The BSE
issued specific instructions to its members to take
necessary precautions while placing orders for the
scrips with an 'infotech' tag. They have also been
asked to verify their provenance before taking any
investment decisions.
Verification of the credentials of many of those
companies was not flattering. Most of them were for-
merly finance companies renamed as software com-
panies, while some of them have been taken over
and transformed into software companies. To set
up a software company as a front is not very
difficult. One just has to install a few computers,
modems, data transmission lines and some peripheral
equipment. Some of them recruit or hire computer-
literate staff to show some kind of activity. However,
most of them may not have the requisite infra-
structure or the right type of personnel required for
running a software company, let alone having any
export orders.
The next step is to set up a subsidiary abroad by
renting a place or just employing a person to conduct
the operations. Setting up a software company purely
for the purpose of taking advantage of the infotech
tag on the stock market may not be a serious issue,
though it may cause considerable loss to an unwary,
indiscreet, imprudent investor. Many of them may
not be aware that the principal activity of such com-
panies is money laundering.
There appears to be a direct nexus between the
export earnings of some of the so-called software
companies and hawala transactions. They use the
hawala route to show income from software exports.
Since most of these companies were former finance
companies, they also have the requisite knowledge
to conduct such underground banking operations.
A floppy disk or a CD-ROM may contain soft-
ware costing a few thousand rupees. By sending a
few floppies or CDs, or by transmitting the software
through the Overseas Communication Service via
satellite, exports valued at a few million rupees can
be recorded in the books. Software, unlike other
goods, is not tangible and it does not immediately
attract the attention of the law enforcement agencies.
Over-invoicing of such exports or the money-
laundering activity associated with them is, therefore,
not easy to detect. It is difficult to judge the value of
software (being an intellectual property) and any
overvaluation of such software can be explained as
opportunity cost. This loophole is being exploited
not only for money-laundering purposes but to
circumvent the Customs Valuation Rules, which
are based on the GATT Valuation Agreement. In
addition certain benefits like tax exemption are
claimed under the Income Tax Act 1961, and other
incentives under the Export-Import Policy of India
1997-2002.
Under s. 80HHE of the Income Tax Act 1961,
profits derived from the export of software
(including some of the infotech-enabled services)
Journal of Money Laundering Control
Vol.
3,
No.
4,
2000,
pp.
351-353
© Henry Stewart Publications
ISSN 1368-5201
Page 351
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