How PM Modi’s demonetisation step could mean a Rs. 60,000 crore bonanza for scamsters with insider info

After the ban of Old High Denomination (OHD) currency notes on 8 Nov, 2016, there are widespread allegations of leakage of this news much before it was announced. If the allegations are correct, it presents a clear case of front running based on the insider information to make easy money from this move.

Lot of people have lost money overnight while some have made money post this decision. Anyone who had prior information of this would surely be on the profiteering side. Hence we will have to analyse set of people who are making money by this decision to separate out people who had no prior information of this and second set of people who had insider information with them.

Black Money
Image: Janta ka Reporter

People are making profit by accepting OHD at discount or selling their assets at very high price in lieu of OHDs. We are hearing news of gold selling at Rs. 50000 per 10 gram in exchange of OHD and old 500 and 1000 notes selling at 20-30% discount (Old Rs. 500 notes being exchanged with new currency of Rs 350 to 400). At a time when people want to get rid of old notes, a fundamental question comes to mind – who are these people accepting the old notes and what will they do with such old notes.

They are the agents (with or without prior information) who will ultimately earn huge profit by depositing it in the banks for full value. There are two ways in which large sum of these notes can be deposited in the banks by these agents:

Cash deposit method number 1: OHD up to Rs. 2.5 lakhs can be deposited by any individual without getting any tax demand. Hence, these agents will scout for poor people who will deposit the black money in their almost non functional bank accounts to earn a 10-20% commission on the amount deposited. Later these poor people will slowly withdraw the money and hand it over to the agents after deducting their commission.

This is equivalent of redistribution of wealth to the extent of 20% from large money hoarders to the poor people of the society. If these set of agents knew the decision beforehand, they would have never paid 10-20% to the poor people to convert it post the announcement. Hence we may classify this as profiteering by agents with no insider information.

Cash deposit method number 2: Large size deposits by businessman, firms and companies to the extent of cash in hand in the books of accounts as of 8 Nov, 2016. There are two category of businessmen who have cash in hand in their books of accounts: A) Physical cash in hand equal to or more than the declared cash in hand in books of accounts; B) Physical cash in hand significantly less than the declared cash in hand in books of accounts.

A) Physical cash in hand equal to or more than the declared cash in hand in books of accounts: A businessman who is having physical cash in hand equivalent to or higher than the cash in hand declared in books of accounts will never accept any old notes at any price as he will not be able to deposit these OHDs due to limitation of declared cash in hand. Hence, we may classify this as no profiteering by agents.

B) Physical cash in hand significantly less than the declared cash in hand in books of accounts: A businessman who is having physical cash in hand significantly less than the cash in hand declared in books of accounts can always accept the OHDs from market at discount to deposit it into his bank account for full value. The question is why will he have less cash in hand compared to what is his cash position in books of accounts. This raises suspicion about these people having prior information of the OHD ban. Hence, we may classify this as profiteering by agents with suspected insider information.

To cross check our suspicion, let us first analyse the possibility of leakage of this information. A move to ban the Rs 500 and 1000 notes would have involved lot of policy makers, politicians, bureaucrats, hundreds of employees of currency printing press involved in actual printing of new notes.

It is human tendency to pass on this privileged information to your near and dear ones by those involved in this process. Hence, there would have been hundreds of people with knowledge of this ban. Whether any of these were involved in front running on this information can be analysed by first understanding the expected behaviour of person with prior information of the OHD ban decision.

Expected behaviour of person with insider information: Suppose, you are a large black money hoarder and you get the information that Rs. 500 and 1000 notes will be banned after 10 days. What will be your first reaction to benefit from this insider information? Below are the steps which a greedy frontrunner is expected to take to benefit from the insider information:

Step 1: You will immediately try to dispense off the OHDs. You may do so by either depositing it in your bank account or by spending it immediately. However, depositing it in bank is not a solution as this will be noticed by the taxman and you may have to pay tax and penalty on it. Hence, the only solution is to go and spend this money on gold, silver, other precious items, business expenses, personal expenses etc. After doing this, you are left with no old notes and hence you are happy that you will not lose any money after this decision is announced 10 days later.


Step 2: Once you have avoided loss by spending/investing your money, you may be little greedier and will try and think of ways to make money based on this privileged information. Hence, only option left is to withdraw your entire bank balance and spend/invest all withdrawn notes of Rs. 500 and 1000 immediately. Assuming you have withdrawn Rs. 10 lacs from bank and invested this physical cash in precious items (without bill), cash business expenses etc.

Now you are left with no physical cash and a cash balance of Rs. 10 lacs on papers. Once the ban is announced, you may buy these notes worth Rs. 10 lacs at hefty discounts for Rs 7-8 lacs and deposit it back in your bank account against your accounting cash in hand position. You have clearly made a Rs. 2-3 lacs profit on Rs. 10 lacs transaction with the help of insider information.

Hence, to benefit from the insider information, one is expected to increase his cash in hand position in his books of accounts while having no cash physically.

Was there a widespread profiteering from this insider information?
As per government, preparations were on for this for last 10 months. Hence the decision would have been known 12-15 months back itself to selected bureaucrats, politicians, RBI staff etc. To benefit from this move, one should have immediately started to increase his cash in hand position in books of accounts by withdrawing maximum cash from banks (and invest/spend it on his cash business requirements, gold, diamond and other precious item purchases). If there was a large scale profiteering, there should have been a larger than usual cash withdrawal from banking system by all those trying to profit from this insider information. For this, let us try to look at the currency withdrawal by public over last one year and compare it to the withdrawal in previous 4-5 years to identify if there was an unusual pattern in this.

Table 1:

Chart 1:

Chart 2:

As seen in chart 2 above, currency with public increased at an annual average rate of 10.8% in last 5 years as against this years’ 17.7%. This is almost 70% higher than the usual % growth for last 5 years.

Chart 1 shows that currency withdrawal this year was unusually higher at Rs. 2.56 Lac crores when compared to the last 5 year average of Rs. 1.16 Lac crores.

However, there was an income declaration scheme under which Rs. 65000 crore of black money was deposited/declared by black money hoarders in September. Hence, the current year withdrawal of Rs. 2.56 lacs crore was a net cash withdrawal figure after a deposit of Rs. 65000 crore under income declaration scheme. Adjusting for this, there was a cash withdrawal of Rs. 3.21 Lacs crore this year versus Rs. 1.16 lacs crore average in last 5 years (Refer to chart 3). Hence, currency withdrawals this year were a whooping 2.05 lacs crore higher than the usual number.

Assuming that if this fake cash in hand accounting position is deposited back by scamsters by purchasing the old notes at 30% discount, this would mean a Rs. 60000 crore benefit for the fraudsters involved in this front-running.

The chart above clearly shows that there was something suspicious about the way the currency withdrawals spiked up over last 1 year which worried almost everyone including RBI and economists. RBI had to resort to aggressive liquidity infusion in banking system by way of open market operations starting March this year to counter the unusual currency withdrawals which were puzzling even for RBI.

How do you catch the frontrunners involved in this currency scam?
The best way for the government to catch these fraudsters is to ask for the cash in hand position in the accounting books of all the businessman, firms and companies (who have deposited large amount of old notes now) for last 1 year. If there is a many times increase (In excess of 20-30%) in the cash in hand on books as of 8 November 2016 when compared to last 5 year trend, it will prove a clear case of wrongdoing and strict action including penalties should be initiated against such persons, firms or companies.

And this 60,000 crore is only one resultant scam because of insider information the currency ban. This article does not cover the benefits accrued by black money hoarders who used advance information of the currency ban to safely park their black money into assets and tax havens.

(The author is a senior AAP spokesperson. The views expressed here are solely the her own. )



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