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Rashmin Sanghvi & Associates

Chartered Accountants

220, 2nd Floor, Arun Chambers,
Tardeo Road,
Mumbai - 400 034,
Maharashtra, India.

Tel. Nos.: (+91 22) 2351 1878, 2352 5694.

Fax : (+91 22) 2351 5275.

Email : [email protected]

Home Articles Economics & Investment         Share :

Resurgent India Bonds

Resurgent India Bonds (RIBs)

5th August, 1998

Finance Minister had announced a scheme of Resurgent India Bonds. State Bank of India has announced the scheme, effective from 5th August 98 as under :

Foreign Currency denominated Bonds issued by State Bank of India to NRIs, OCBs and Banks acting in fiduciary capacity on behalf of NRIs/OCBs.

1. Salient Features :

1.1 Tenure : 5 years

1.2 Currencies : US Dollar, Pound Sterling and Deutsche Mark.

1.3 Interest Rates: US Dollar – 7.75% p.a., Pound Sterling – 8.00%, Deutsche mark – 6.25%

1.4 Minimum Subscription: US Dollars 2000; Pound Sterling 1000; DM 3000. Additional investments, in multiples of 1000.

1.5 Payment of interest: Half yearly, or at the option of the investor, cumulative.

1.6 Repatriability: Principal and interest will be paid in foreign currency to non-resident holders.

1.7 Joint holdings : Permitted with non-residents/residents, in the form of ‘Former or Survivor’.

1.8 Tax benefits: Interest exempt from income tax.
Bond exempt from wealth tax and gift tax. (In any case, all bonds are free from wealth-tax & there is no gift-tax.)
Income-tax benefit will be available to transferee and donee holders also.

1.9 Transferability : by endorsement and delivery.

1.10 Premature payment : No penalty, however, only in non-repatriable rupees, after a minimum period of 6 months.

1.11 Loans : available to holders and third parties against collateral of the Bonds.

1.12 Utilisation of funds raised : mainly for the development of the infrastructure sector.

1.13 Date of launch : Wednesday, 5th August, 1998.

1.14 Scheduled closing date : Tuesday, 4th September, 1998.

1.15 Earliest closing date : 10 working days.


2.1 This is not an immunity scheme. The RIBs are not like the India Development Bonds issued by the State Bank of India under the Immunity Scheme of 1991. There is no immunity granted under any law either for the subscriber of the bonds or for the receiver of gift of bonds. Hence RIBs cannot be used for money laundering.

2.2 If the history is any guide, several brokers will come up like mushrooms and several gullible people will “buy” the RIBs.

In the following paragraphs, we explain the dangers involved; give the arguments that the brokers usually give and explain why the arguments are false.

3. Modus operandi for Money Laundering

When Mr. Patel with black money wants to launder that amount into white, he would pay cash to a broker or an NRI. The broker will deduct his commission & transfer the money to an NRI by “havala”. The NRI would purchase/subscribe the RIBs. Later on, he would gift the RIBs to Mr. Patel.

There are several permutations & combinations. Above is a simple method illustrated.

4. Broker’s Argument

The broker argues in favour of the entire business on the following lines.

4.1 Under FERA, there is no restriction on receipt of gifts of RIBs.

4.2 There is no Gift-tax now.

Both the transactions – of subscription of RIBs by an NRI; and gift of RIBs to Indian residents - are perfectly legal & above board.

4.3 There is no evidence of the cash paid by Mr. Patel. And he may not be involved in havala. So why should he worry?

5. The fallacy

5.1 The moment, foreign exchange & NRIs are involved, FERA is involved. Simple black money in India is violation of Income-tax Act & Wealth-tax Act. In the above scheme, a violation of FERA is also involved.

5.2 “Havala” is one of the more serious violations of FERA.

5.3 “Enforcement Directorate” (ED) probably knows all the important havala racketeers. It knows where to apply its intelligence network.

5.4 Paying cash with an intention of obtaining RIBs is violation of FERA. One who does these transactions cannot claim to be ignorant of the law. In any case “ignorance of law” in such cases may not be adequate excuse.

5.5 When a matter goes before the ED, they do not ask for evidence. They have other methods of making the party confess. And a businessman normally cannot withstand the pressures involved. He will sign the confession with full details.

There will be the usual costs; the penal & prosecution proceedings will continue for ever.

5.6 Income-tax officer can treat the RIBs as unexplained investments under sections 68 to 69B, treat the amount as undisclosed income and start tax recovery, penal & prosecution proceedings. See paragraph 13 under “Gifts” chapter in our book Indian Economy and the Budget 1998.

All consequences put together are high.

Tax @ 30% is a lower cost than the cost of taking such risks.

We would strongly discourage anyone from using RIBs for laundering their money.

6. RIBs are not meant for Indian residents having black money (or even white money) in India.

They are also not meant for Indian residents having black money abroad.

RIBs are only meant for non-residents.

7. A genuine non-resident may certainly find RIBs a good investment. If, later, he wants to make a genuine gift to any of his relatives, it is perfectly legal.

8. The above details were mentioned at the time the RIBs were introduced. The bonds under the scheme were redeemed in 2003. Above details are maintained only for historical information purposes.