When
income-tax authorities busted a Delhi-based software company that
was doing business with a blue chip IT company, they found to
their horror that there were no computers in the office premises.
The ones that were there were still packed. The son of the
software company owner told one investigator, “My father does
not even know what a mouse of a computer is, let alone the meaning
of software.” Shell-shocked investigators realised that this
Delhi-based company had already transacted business worth Rs 500
crore with the blue chip company. It was only later that they
discovered no business had been transacted; only money had been
rolled over to improve valuation. When the income tax officials
took up the matter with finance ministry officials, they were told
to keep quiet as it could hurt India’s image as an IT
destination.
This
is a representative story of many such shell software companies
which have minted money in the share markets. Even today after the
big burst of the Dotcom bubble almost "EVERY"
investor dreams of owning stocks of technology companies looking
at their high growth potential and fantastic returns they
provide. Since, many of the infotech stocks are out of reach of
the small investor considering their phenomenal prices; they rush
for the smaller and the relatively cheap infotech stocks. But
every company is not TCS or Infosys.Some of them are the shell
companies which have the only business of laundering the money.
Many techies have started investing in the shares and they look
for the attractive growth prospects. How do such companies operate
and show decent earnings is the main question? There seems to be a
kind of nexus between the export earnings of some technology
companies and money laundering transactions.
Many of these so-called software companies were known to be using
the Hawala route in order to show income from
software exports. Getting the knowledge about these transactions
was not a big deal. It is provided to these companies by the
CA's,Lawyers and other professionals who knows the transactional
loopholes.
A
Hawala transaction simply means that you pay rupees over here in
India and in return get dollars abroad. For instance, if you want
to do a Hawala transaction from Mumbai to USA, then by paying Rs 1
lac in Mumbai, you can transfer $2500 in USA.
How
it happens ?
Let us take
a simple example to prove our case. Assume there is an existing
BSE-listed company, which is closed and is not trading at all.
Today, there are over 7000 companies listed on the BSE, of which
more than 4500 companies are in the B2 category and are hardly
traded. Many of these companies may have even closed down and are
mostly based in places like Ahmedabad, Chennai and Hyderabad. It
can happen that two or three people get together and take over
such a company changing its name to an infotech company. Its even
possible that the existing promoters of the company simply change
the name of their company to a software company. By installing a
few computers, modems, data transmission lines and other
equipment, a software company is born.
Some computer literate staff is also hired to show some kind of
activity present in the office. Such companies do not even be
having the requisite infrastructure or the requisite personnel
required running a software company forget aside the any export
orders. The next step is to set up a subsidiary abroad by renting
a place or just even employing a person to conduct the operations.
Most of the exports are done to duty free ports such as Hong Kong,
Singapore or Dubai where the money can be remitted back. After
that, the promoters conduct Hawala transactions by paying cash
over here and getting dollars from abroad through the subsidiary.
The same dollars transferred from abroad are shown as software
exports in the company's books. In this way the company is able to
report decent sales figures in its balance sheet by the way of
export income.
The next step is to catch a flamboyant market operator through
whom rumours about the company can be floated in the market. The
share broker or the operator then spreads stories such as the
company has got big software development orders or tie-ups and is
going to report excellent profits. Naturally, the bogus export
income drives up the net profit reflecting a healthy Earnings Per
Share for the company. Since, the P/E of the company appears to be
quite low in comparison with the industry standards; the stock
appears to be an excellent buy.
The market operators start providing liquidity in the counter and
consequently the volumes in the counter start rising. Many of the
deals take place between two or three operators itself who start
creating a demand for the stock. The stock price of the company is
jacked up touching three to five upper circuits in succession. The
promoters taking advantage of this situation start dumping their
own stock to the small investors who in turn enter to buy. In the
end we have the small investors who are left holding the stock
which they have purchased at the high prices.
Thus the promoters are able to benefit in two ways. Firstly they
are able to get a good price for the dead stocks of their company,
which were not being traded at all and secondly are able to
convert their cash into official export income at a low premium
without paying any income tax.
However, the question which authority is responsible to check
whether the companies are actually engaged in and whether their
exports are genuine or not? If no one is then some body or
authority has to be appointed who can monitor the activities of
these companies. This is necessary so that the investors can be
more enlightened about such companies before putting their
hard-earned money into them.
This is the magic of technology !
Mayur
S.Joshi*
Author
is promoter of Indiaforensic Research Foundation and also the
winner of the prestigious global ACFE award. Author can be reached
at mayur@indiaforensic.com
