Last week, the Reserve Bank of India (RBI) announced a withdrawal of the Rs 2,000 notes, keeping its status as legal tender intact. It has given four good months until September-end to exchange these notes at any branch of any bank in the country, capping a single transaction of 10 currency notes. As the news broke, the bullion market got a flurry of calls asking the price of gold against the payment in Rs 2,000 notes. The indicative premium hovered at 5-10 percent in the first 24 hours after the announcement, which meant the notes could be changed to gold at Rs 64,500- 66,500 per 10 gm. While it will be interesting to watch how the entire saga evolves over the next four months of the “exchange window”, the conversion of enquiries into actual transactions is extremely low, and will remain so or even fade over the next few weeks for a number of reasons.
Since the demonetisation of Rs 500 and Rs 1,000 notes in November 2016, the Indian economy has taken a quantum leap in regulating internal and cross-border illegal financial transactions. A massive digitalisation of the financial system, thanks to COVID-19, has further made it difficult for cash hoarders to escape from leaving any trace of their transactions. Similarly, the unfolding of events before the recall of the Rs 2,000 notes hints at the government’s preparedness to ensure its purpose of withdrawing the Rs 2,000 notes succeeded.
Widening Ambit of PMLA
The most important of these measures was the widening of the ambit of the Prevention of Money Laundering Act, 2002 (PMLA). On May 4, the government designated bullion dealers as ‘Reporting Entities’ to bring them under the Prevention of Money Laundering Act, 2002 (PMLA) and Unlawful Activities (Prevention) Act, 1967, mandating them to adhere to anti-money laundering (AML) standards, and combating proliferation financing obligations. The step made bullion dealers responsible to follow client account opening procedures and maintain records of such transactions as prescribed by the PMLA if they engage in single or multiple cash transactions of a total of Rs 10 lakh if they appear to be linked. Reporting suspicious and specified transactions to the Financial Intelligence Unit is also required under this provision.
Through another communication, the government included chartered accountants, cost and management accountants, and company secretaries as reporting entities, making them responsible for reporting on behalf of their clients about transactions such as the purchase of assets or immovable properties or management or operations of companies preventing routing of transactions through shell companies. Besides, politically exposed persons outside India, banking intermediaries and financial companies, the entire crypto ecosystem, NGOs, trusts and foreign portfolio investors were all brought under the PMLA before the recall of Rs 2,000 notes.
More importantly, the regulatory tightening of the financial systems under PMLA through comprehensive KYC structures assumes a lot of significance ahead of the proposed assessment of India under the Financial Action Task Force (FATF) likely to be held in November and slated for discussion in the plenary discussions in June 2024.
Apart from the regulatory tightening, the bullion industry itself has transformed with around 50 percent of the four lakh plus jewellers becoming part of the organised segment since 2016. These players will certainly refrain from short-sighted illegal cash-to-gold swaps to prevent possible scrutiny by government agencies and protect their brand image. We have seen some of the big names are already under the radar of the Enforcement Directorate under PMLA. Still, tens of tonnes of gold would be exchanged against the illegal cash though at a much lower premium as the number of unorganised players still runs in six digits. That’s equivalent to the quantity of gold that changed hands in the first six hours after the announcement on demonetising Rs 500 and Rs 1,000 notes in November 2016.
The gold-to-cash swap will not be economically viable in a big way this time. For example, when cash-hoarders paid a 40-50 percent premium on the official gold price of around Rs 30,000 per 10 gm, it was necessary for them to see gold reaching their acquisition cost at the least. That took more than four years, that too because of the outbreak of the COVID-19 pandemic sent gold prices soaring above Rs 50,000 in the mid-2020s. This might deter many cash hoarders from swapping their currency mop-up for gold.
Shrikant Kuwalekar is an Agri Journalist, Price Risk Management & Agri Value-Chain strategist. Views are personal, and do not represent the stand of this publication.