Demonetisation tricks: The hair-cut that converts old currency notes into new

Mangalore Today News Network

Dec 01, 2016: In Nepal’s border city of Biratnagar, located close to Bihar, you find the most vivid illustration of the ability of Indians to convert old high-denomination currency notes into new ones without depositing their stashes of black money into banks or disclosing these to the government.

On November 8, when Prime Minister Narendra Modi announced that old Rs 500 and Rs 1,000 currency notes would be demonetised overnight, the money-changer in Biratnagar was just about willing to pay on par – that is, a person’s Rs 1 lakh could fetch her the equivalent amount in the Nepali rupees. This signified a sharp loss: before November 8, Rs 1 lakh in Indian currency could have got 1.60 lakh Nepali rupees.

Soon, the exchange rate started to go north – Rs 1 lakh could be changed for 1.40 lakh in Nepali rupees. From November 29, the exchange rate dipped a bit.

This was because of the Indian government’s new legislative proposals that seek to levy 50% tax on those who declare their black wealth and make it mandatory for them to park 25% of their disclosed amount in interest-free deposits with a lock-in period of four years.

“The Indian government’s announcement of November 28 saw Rs 1 lakh fetch anywhere between Rs 1.30 lakh and Rs 1.25 lakh in Nepali rupees,” said a businessperson in Biratnagar. “Truck drivers are still taking half their dues in new notes and the remaining in old Rs 1,000 or Rs 500. It shows the gangs engaged in converting old currencies into new ones remain high.”

If money changers in Nepal feel confident, it is because their patrons in India are reasonably certain of hoodwinking the Union government to change old currency notes into new ones after taking a hair-cut, a term usually used in the equity market to refer to the difference between the market value of a security and the value assessed by the lending side of the transaction.

In these confounding days of demonetisation, the hair-cut is defined as the cost a person incurs to convert his or her stash of invalid currency notes into the new high-value denominations or even Rs 100 notes.

Here are a few methods that people are using to turn their invalid currency notes into legal tender.
Multiple shell accounts

India has always had agents whose business is to convert black money into white money. For this purpose, they open bank accounts in names of people who have identity proof – and who are known to them. There are agents who are said to operate as many as 500 such bank accounts.

Every year, agents file income-tax returns on behalf of these account-holders, even paying tax to the government ranging from Rs 15 to Rs 100 to Rs 500.

Agents operate these accounts to make electronic transfers, known as Real-time Gross Settlement Systems or RTGS.

It is through RTGS that old currency notes are turned, rather magically, into new ones.

Assume person X approaches agent Y to change a stash of Rs 10 lakhs in old currency notes into new ones. Agent Y has a clutch of bank accounts that he operates. He deposits Rs 2 lakhs in old currency notes in the account that is in the name of A. Since the amount is below Rs 2.5 lakhs, A will not be asked to explain the source of his money.

Agent Y uses RTGS to transfer Rs 2 lakhs to the account of B, and also deposits Rs 2 lakhs in old currency notes into that account. This Rs 4 lakhs amount is then transferred to C’s account, into which another Rs 2 lakhs in cash is deposited. The Rs 6 lakhs that has accumulated is now transferred to D’s account, which is then replenished with a cash deposit of Rs 2 lakhs. The accumulated Rs 8 lakhs is transferred to agent Y’s account (or for that matter, in E’s account) where another Rs 2 lakhs is added.

Agent Y now has Rs 10 lakhs, which is the amount person X had given the agent to exchange from old to new. Y transfers the amount to X. He shows in his books that Rs 10 lakhs has been given as a loan to X.

A few days later, X issues a cheque of Rs 10 lakhs to agent Y, or electronically transfers the amount to Y’s account. In his books, Y then shows that the loaned money has been returned. He will withdraw Rs 10 lakhs once the limit on withdrawal is lifted in January 2017. The amount he will receive will be in new currency notes.

It is considered safer if X and Y are relatives or have had business relationships in the past. After all, nobody lends Rs 10 lakhs to an unknown person.