Bid to check ‘abnormal trades’, brokerages face 100% penalties

Stock exchanges have begun a crackdown on dubious trades on their platform to evade taxes. Bourses have sent notices to brokers directing them to pay 100 per cent penalty of the traded value for ‘abnormal trades’ executed on behalf of their clients, sparking protests from trade bodies seeking a withdrawal of these fines.
By the end of a financial year, several investors, especially high net worth individuals (HNIs), use the stock exchange route to evade tax. While the Securities and Exchange Board of India has cracked down on such transactions in the past, this is the first time stock exchanges have started penalising brokers for ‘abnormal trading.’ What has miffed brokers, though, is that exchanges have not defined what is ‘abnormal trading.’ On December 13, 2018 both BSE and NSE issued a circular on abnormal or non-genuine transactions asking trading members to refrain from entering into abnormal transaction executed by the clients with an objective of transferring profits or losses between the concerned entities by creating artificial volumes.
While stating that the decision of whether a trade is abnormal or nongenuine would rest with the exchange, the circular said that exchanges would levy of 100 per cent of the traded value.

In the last two years, Sebi has barred several brokers from accessing the market on suspicion that they were helping clients evade capital gains from stock trading. These entities traded in penny stocks, helping clients convert unlawful money into legitimate income.

Before the tax on long term capital gains was introduced last year, they managed to get away without paying taxes. Similarly, they also made losses in stock trades to help offset them against capital gains.

A Sebi investigation showed penny stocks without any operations raised huge capital by allotment of preferential shares to various entities. This was followed by a sharp rise in share prices after the preferential allotment through circular trading. Artificially inflated stocks are then offloaded through companies funded by those seeking to convert unaccounted money into 'white' money.

Miffed by the notices, brokers have urged stock exchanges to withdraw the circular or clarify abnormal trade. In a letter to BSE & NSE, the Association of National Exchanges Members of India (ANMI) asked stock exchanges to keep the implementation circular on hold till exchanges issue appropriate parameters as to what should be construed as abnormal trades.

“Any action by the exchange penalising members without laying down parameters or guidelines amounts to depriving of opportunity of natural justice; hence there is an utmost need to issue clarification in this regard,” said the letter.

An email sent to BSE and NSE did not elicit any response till the time of going to press.

According to brokers, there can be situations wherein a client may be buying at one member terminal and selling through another member terminal and in such cases it is not possible for two brokers to know the names of the clients, their relationship or motive behind such trade.