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Demonetization :Where currency reflects economic fundamentals


DEMONETIZATION : LEARNINGS



  1. Demonetization is an act of stripping a currency unit of its status as legal tender. This action is taken by various countries including United States Of America on different occasions to achieve different objectives. In the recent past India has witnessed an extensive demonetization exercise and more than 15 Lakhs currency notes of Rs. 500 & Rs. 1,000 denomination ceased to be legal tender.
  2.  This is not the first demonetization incident in India. Earlier, Rs, 1,000 and Rs 10,000 banknotes, which were in circulation, were demonetized in January 1946, primarily to curb unaccounted money.

         The higher denomination banknotes in Rs 1,000, Rs. 5,000 and Rs 10,000 were reintroduced in the year 1954, and these banknotes (Rs 1,000, Rs 5,000 and                 Rs 10,000) were again demonetized in January 1978. So that makes it the last time demonetization was done in India, almost 36 years ago. Also Reserve Bank of India in an announcement withdrew  all banknotes printed before 2005 at the end of March 31,2014.

In the current demonetization exercise the main objectives remained as under:-



Aim



  1. Unearthing Black Money
  2. Prevention of Money Laundering/ Terror Financing
  3. Increase in tax revenues
  4. Reduce monetary  liabilities etc of Government
  5. Promotion of cash less system of transaction in Economy.



Escape route adopted for Conversion of unaccounted SBNs (Through)



  1. Through accounts

  • Deposits of SBNs in money mule. (Zero balance/PMJDY) accounts.
  • Deposits of SBNs in dormant or Newly opened Shell Companies/ Partnership accounts.
  • Third Party deposits without authorization (Home/Non Home).
  • Issuance of Drafts/ BCs against SBNs and their cancellation.
  • Deposit of SBNs in in-operative accounts.
  • Back dated FDs in Co-operative Banks RRBs and Credit Societies.
  • Booking of expensive train/Air tickets and get their refund through cancellation.
  • Deposits through Consultancy on firms run by CAs (Gate Keepers) area.


  1. Through Cash Transactions



  • Swapping of SBNS with the legal tenders deposited by other customer at counter.
          (New voucher prepared)

  • Swapping of SBNs through BC/CSPs deposits.
  • Exchange of SBNs through different IDs by a person in different Banks/ Branch’s.
  • Use of fake IDs for exchange of SBNs at different Banks.
  • Bulk exchange of SBNs with Legal tenders deposited by Corporate Customers. (Change in voucher with SBN denomination)
  • Exchange of SBNs in bulk at Petrol pumps, Medical Shops, Toll Booths and Government Tax Payment Centers etc and their eventual deposit with Banks.
  • People giving donations to temples which will exchange it in new currency notes/ low denomination notes and keep commission for this service.
  • Giving interest free loans to poor people/ farmers
  • Exchange notes on discounted rates through bank note mafia.
  • Pay advance salaries to employee’s up to 2.5 lakh.
  • Purchase foreign currency against SBNs.
  • Purchasing Gold against SBNs/ in some cases against post dated delivery notes.
  • Deposit of SBN in GL accounts/ Concentration accounts followed by transfer/ RTGS etc.
  • Third party deposits of SBNs in accounts/ Non Home deposits of SBNs.

    Conversion of SBNs


  • Gold ornaments & Bullion – back dated sales : 
         future delivery

  •  Real Estate – back dated Sales/ borrowings
  •  Forex accumulation
  •  Hawala remittances
  • Liquidation of loan outstanding

    Preventive Steps


  1. Fixing  ceiling for deposits/ and withdrawls in PMJDY/SBSA  accounts.

  • Half yearly obtention of balance sheet/ books of business units to prevent back dated sales/ unusual cash as hand balance.
    2.   EDD before acceptance of deposits  in inoperative/ dormant accounts of companies (Shell) proprietorship/ partnership firms etc.

  • Fixing limits for Non home Deposits/ withdrawals.
  • EDD for Third Parties deposits in accounts (Limits could be fixed).

                                                                                              By :Sneh Deep Agnihotri

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