An increased penalty, regular surveillance and monitoring helped, says FMC.
The occurrence of client code modifications (CCM) have declined sharply in the commodity derivatives market since the regulator, the Forward Markets Commission (FMC), intensified vigilance and increased penalties with effect from October 1.
According to FMC sources, clients’ codes were changed for trades worth Rs 1,307 crore in September. This dropped by 97 per cent to a mere Rs 36 crore in November, thanks to the strict measures taken.
Applicable only for genuine typographic errors, CCM is a change in client codes (identity) for executing trade on the futures platform. Exchanges modify client codes on request from members who trade on behalf of their clients.
“Apart from raising penalty significantly to one per cent of trade value, we tightened noose on the change in client code done on purpose. This helped a lot in bringing down the modification level,” said FMC Chairman Ramesh Abhishek.
Effective October 1, FMC passed a stringent order, asking all exchanges and their members to adhere to that. The CCM facility was allowed only for carrying out correction in cases of genuine punching error(s) in client codes, within 15 minutes of the closing of trading sessions. The regulator also suspended intra-day CCM. Besides, proprietary trades were not allowed to be modified as client trade and vice versa. FMC had clarified that any violation of this provision would lead to disciplinary action against the member by the exchange.
While clarifying about the penalty, FMC had kept the minimum penalty base at Rs 25,000 per change per CCM, irrespective of the value of trade. In case of genuine punching error(s), however, exchanges were given the power to waive the penalty after determining genuineness on the basis of a set of criteria.
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Earlier, the penal provision differed depending on the nature and quantum of trade. If changes were made in less than one per cent of client codes of the total orders matched on a day, the penalty was waived, while a penalty of Rs 500 was levied between one per cent and five per cent and Rs 1,000 between five per cent and 10 per cent of the total matched orders. The regulator also made a provision for a Rs 10,000 penalty in case the proportion of client codes changed to the total orders (matched) on a daily basis surpassed 10 per cent mark.
Finding the penalty negligible traders were changing client codes, on purpose, with false arguments, to evade taxes. In separate investigations, FMC discovered most modifications were done for tax evasion. Traders even happily paid the penalty for such changes, which made the practice legal. Understandably, CBDT issued notices to large traders over modifying codes frequently, assuming that they had evaded transaction and other texes.
For example, the occurrence of CCM was very high, in trades worth Rs 14,570 crore, in March this year. With a three per cent volatility in prices, an additional sum of Rs 450 crore was generated by just changing the client code. This helped evade around Rs 150 crore of various taxes.
Apparently, the penalty collected through CCM has significantly gone up in the last three months. In September, the total penalty collected on CCM stood at Rs 1.25 lakh. This shot up to Rs 24.8 lakh in November.
In September alone, commodity brokers could have paid around Rs 13 crore in taxes, which was feared evaded. This meany, commodity traders have now been seriously adhering to FMC guidelines, a trader said.
FMC is gradually following in the footsteps of capital markets regulator, the Security & Exchange Board of India, which raised the penalty on CCM exorbitantly. This helped bring down the occurrence of CCM in equity markets also.