Equity market brokers will have to follow strict rules for changing their client account details. The stock exchanges, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), have announced broad criteria for modifying client codes at the end of each trading day.
Exchanges were asked to form criteria for such changes as the facility was being misused. Some brokers transferred gains or losses from one person to another by changing the client codes, in the garb of correcting an error. These gain or loss book entries were then used to evade taxes. Brokers, however, are not happy by the new rules of the exchanges as they were only for non-institutional category. Punching or trading ‘errors’ were common in the institutional trades too and they were often reversed by the end of the day by changing client codes. There is high possibility of malpractices by changing client codes in the institutional trades than the retail. Order size of intuitions is quite large and hence profit and loss too is big enough, brokers say.
The Mumbai income-tax department has already slapped a Rs 2,000 crore notice on foreign institutional investors for not showing their investments. The notices were send at the beginning of this year. I-T officials said they found discrepancies between the trade data provided by brokers and the reported income of these FIIs.
FIIs on their part have told brokers that transaction data were not related to them in many cases even if the deals were done using their code and in their accounts. It was found that several trades were conducted in particular FII accounts. However, while the FIIs concerned could give the details of some trades of their clients, the details of a large number of trades were not available. Several FIIs did not maintain proper know-your-customer documents, as this was not mandatory during the assessment year in question.
Later, discrepancies in payment of securities transaction tax by FIIs were also found by I-T, sources said. FIIs have gone in for an appeal against the I-T notice. It is believed the cause for such discrepancies was the change in client codes at end of the day and thereby brokers for large institutions, who indulge in changing codes, should be penalised.
More From This Section
Following I-T notices, the Central Board of Direct Taxes (CBDT) in March had issued a circular alerting the exchanges about tax evasion through change in client codes. CBDT also asked the exchanges to furnish data of changes to client accounts in the recent past and in futures.
Following, CBDT’s concern, the Securities and Exchange Board of India (Sebi) too decided to impose penalty on brokers who indulged in unnecessary changing of client codes.
Exchanges were asked to furnish the transaction ID, broker’s name and ID, original client code, modified client code, name of the original client, PAN of the original client, name of the modified client, PAN of the modified client, scrip name, quantity, rate, total value of transaction, buy or sell and date of transaction for codes modified during the month. However, this was only for non-institutional category.
The regulator advised stock exchanges to set objective parameters for identification of client code modifications arising as a result of genuine error or wrong data entry.
The criteria, which will specify errors in trade would include two broad parameters: If original client code/name and modified client code/name are similar to each other but such modifications are not repetitive and if original client code and modified client code belong to a family. (Family for this purpose means spouse, dependent parents, dependent children and HUF).
Stock exchanges have also designed a monthly penalty structure for client code modifications for non-institutional trades in equity derivatives segment and currency derivatives segment. In addition to this penalty structure, suitable disciplinary action proceedings would be initiated in cases where value of modified trades of non-institutional clients is significant.