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Disclaimer: I am not at all knowledgeable on the subject. This is a question based on the reading I've been doing about demonetisation.

One of the objectives of demonetisation was curbing black money or money that tax should be paid on, but isn't. Going in, no one appears to have had an idea of how much black money was in the form of cash. Many people speculated that the money that didn't get deposited in banks would be black money.

I understood this to mean that the RBI had issued 14 lakh crore worth bank notes. Of these, 30% or about 5 lakh crore 1.6 lakh crore [see update below] were estimated to be with various governments, government organizations and banks. That left 9 lakh crore 12.4 lakh crore to recover as deposits in the banks and RBI.

Initially the thought seemed to be that the amount out of the 12.4 lakh crore that didn't return to banks would be black money. Various theories were discussed - whether they could be written off or not, used to recapitalize banks or not... not going there for now. But basic concept was that if - hypothetically - 9 lakh crore got deposited by 30th December (and then 31st March with RBI?), the remaining 3.4 lakh crore would be the black money. Now logically, at least some notes won't return - maybe lost in floods or forgotten in some old purse or whatever. But any significant number (no idea how much that would be) is black money

Yesterday, on the 28th of November 2016, with over a month still left for people to deposit money into banks, the RBI announced that money deposited or exchanged at banks had reached 8.5 lakh crore. This means that thee is supposed to be at the most 0.5 3.9 lakh crore out there. However queues outside banks are still reportedly going strong.

My question is, if, in less than half the time allocated for deposits, we have already recovered most of the notes issued by the RBI, what happens in the remaining duration of slightly more than a month?

Never mind black money. What happens if the notes deposited into banks exceed 0.5 3.9 lakh crore, bringing the total of cash over the 14 lakh crore in notes issued by he RBI? It seems possible, given that the queues are still going strong and that in less than half the time provided, deposits are over 72% of those expected in "ideal" conditions in the full duration provided.

Would that mean that the demonetisation likely converted fake notes into legal money and still found no black money? What would it mean for the liability of the RBI (I haven't fully understood how the liability thing works, but clearly it is a careful balance).


What would the implications of something like that be?


Update: Sonali Ranade pointed out that some of the 5 lakh crore reported to be with banks and government may have an overlap with money getting deposited in banks. Notes with banks will not, but notes with government organizations like Railways, for example will get deposited in the SBI and be counted again. What this amount is is unclear. Trying to find out.

Update 2: While the money with government and banks was estimated to be at 5 lakh crore, there is a better way of estimating money already with banks alone. An interesting piece by Ira Duggal for Bloomberg-Quint uses RBI reports to arrive at the money in bank chests being Rs. 2.5 lakh crore on the 11th of November. Roughly estimating 86% of this to be in the banned notes, the money in banned notes already with the banks on 11th November would be 2.15 lakh crore. Deduct the 53,000 crore reported by the RBI as deposited within the first 2 days, and you have an estimated 1.62 lakh crore in banned notes with the banks at the start of demonetisation.

Mumbai, 18th Nov, 2013: Weeks after coming out of BIFR, the loss-making Mafatlal Industries appears to have sold assets to their own directors for peanuts. On 31st July 2011, Mafatlal Industries Ltd. sold to director of Mafatlal Services Ltd. Mr Rajendra Likhite and his wife Anagha, a prized 1200 sq feet flat on Mount Mary Road, Bandra, for a measly Rs. 1.25 crore, with a 200 sq feet garage thrown in free. As the garage alone is reckoned to be worth Rs 25 lakh at the market rate prevailing at that time, it means that the flat was sold at Rs 8,000/- per square foot – a price that may be suitable in distant suburbs like Dahisar or downmarket areas like Kurla – but hardly the price for an 8th floor sea-view apartment in a prime location where celebs like Shah Rukh Khan, Salman Khan and Subhash Ghai reside. It is learned that comparable transactions in that posh neighbourhood and in the same building were happening at about Rs 6 cr at the time – Rs 50,000 per square foot!

Mr Likhite had occupied the company’s flat since 1995. Interestingly, the high profile auditor Deloitte Haskins & Sells turned a blind eye to the undervalued sale of this flat while auditing the balance sheet.

Legal implications of sale of Mafatlal flat

As per the Companies Act 1956, Mr. Likhite was a director of Mafatlal Industries at the time of this suspicious sale. So:

  1. The company was required to pass a board resolution for such a transaction.
  2. A shareholder can ask justification for this transaction in which the director is being rewarded indirectly, and shareholders are being fleeced of their company’s asset.
  3. For the Company, it is a dividend given to its director, which is taxable.
  4. The difference amount between actual value (reckoned at Rs 6 cr.) and the sale price (Rs 1.25 cr) would be considered as income of Mr. Likhite, which is taxable at 30% and more.
  5. Further, under section 271(1)(c)- concealment of income or inaccurate particulars attract 100% to 300% penalty.
  6. The company was required to deduct TDS on this deemed income of Mr. Likhite.

Incidentally, the company’s balance sheet for that financial year (see page 26 of link given below) says that in the previous financial year (i.e. before it sold this Kanti Apartment flat in Bandra West), it sold fixed assets worth 131.04 cr. Now that raises doubts as to how much those earlier assets were undervalued, and who the beneficiaries were, also and whether BIFR (Board for Industrial and Financial Reconstruction) was involved.

What the other side says:

Despite the clear mention of Mr Likhite’s name on the website of Registrar of Companies (See http://corporatedir.com/company/mafatlal-services-limited ), both the company secretary and Mr Likhite maintained that he was only an employee, and not a director. (Note: as per Section 370(1B) of The Companies Act, 1956, being a director in a group company i.e. Mafatlal Services Ltd. is tantamount to being a director in Mafatlal Industries Ltd.)

The response of Mafatlal Industries’ group’s Secretary, Mr Rasesh Shah, is as follows:
“Mr. R R. Likhite is not and was never a Director of the Company, Mafatlal Industries Limited. He is working with the Company for the past 28 years. In accordance with the terms and conditions of his service, the Company had provided him with an accommodation and he has been staying at Kanti Apartments since 1995. As regards your allegations on various legal grounds, we would like to clarify that the Company adheres to the best compliance standards and had obtained prior approval from the Board of Directors. In order to support the Board to reach the right decision, the transaction was supported with an independent valuer's valuation report. Further, the Company has complied with all the requisite provisions of the Companies Act, 1956 as well as the provisions of the Income Tax Act, 1961 in respect of the transaction for sale of flat and the Company has also paid all the taxes legally payable on the transaction and has filed the Income Tax Return accordingly. At the time of sale of flat at Kanti Apartment, since the Company was out of BIFR, no permission of BIFR was required.”

Echoing Mr Likhite’s response, the company’s official letter went on to impute malicious intent and other motives to Mr Sulaiman Bhimani. Please read full copy of the company secretary’s response: http://tinyurl.com/Mafatlal-CS

Email response received from Mr Rajendra Likhite can be read here: http://tinyurl.com/Mafatlal-likhite

The official spokesperson of the company’s auditor Deloitte Haskins & Sells, Ms Malika Kumar, refused to comment. The office of the Chairman of BIFR, Mr B S Meena, had also not responded to faxed and phoned queries at the time of going to press.

Sale deed for the flat and Mafatlal’s balance sheet: http://tinyurl.com/Mafatlal

Issued in public interest by

Krishnaraj Rao (9821588114, krish.kkphoto@gmail.com)

Sulaiman Bhimani (9323642081, designerstouch11@gmail.com)