NSE to directly link trades to investors’ PAN to curb self-trading, fake deals

MUMBAI: Stock market operators will soon find it tough to rig share prices without coming under the regulatory radar. India’s largest bourse, National Stock Exchange (NSE), will soon alert brokers that all trades will be directly linked to investors’ Permanent Account Number (PAN) over and above the existing system of a unique client code.
The move is aimed at clamping down on dubious trades that result in misleading volumes and help individuals convert illegitimate cash into legal money and even lower taxable income with fake losses.

Currently, trades are executed on the basis of the client code, assigned by a brokerage to every member. But, since investors can open trading accounts at multiple brokerages, they can have that many client codes. Though capital market regulator Sebi has cracked down on several trades on stock exchanges that were used to convert black money into white, the surveillance departments of the regulator and the stock exchanges have found it tough to monitor questionable trades on a live basis.

With the introduction of PAN as a monitoring feature, instances of self-trading may be minimised as every investor has only one PAN. “It will help watch trades almost on a live basis and can be a good tool to prevent such suspicious trading,” said the managing director of a listed brokerage.

When contacted, an NSE spokesman said, “Yes, we have monitored self-trade monitoring mechanism. In future, we can even improve upon this PAN-based system on the advice of the regulator.”

The exchange will introduce the PAN-linked trades in all segments — stocks, currency futures, equity F&O, interest rate futures (IRF).

NSE has implemented a periodic alert mechanism to alert members doing selftrades beyond predefined threshold levels in each stock or contract. Such alerts are made three times a day. For trades done between 9.30 am and 11 am, the alert is issued at 11 am. The next alert is at 1.30 pm for transactions done between 11 am and 1.30 pm.

The final one is during the market close for trades between 1.30 pm and 3.30 pm. If the member does not take action to restrict or eliminate self-trade, the exchange would take graded regulatory actions like issuing warning letter, summoning and finally leading to temporary suspension.

The move to use PAN comes after instances of unusual activity in deep out-of-themoney options in one of the exchanges. It was felt that exchanges should actually move beyond the conventional approach of only looking at ‘trading member-client code’ combination.

Sebi has been investigating several small companies listed on stock exchanges and has banned a few for their alleged role in enabling conversion of unaccounted cash into legitimate money.

Many of these companies had no businesses or had little revenues but their share prices had jumped multiple times. Sebi found that many of these shell companies had generated fictitious longterm capital gains for individuals.