Instances of the so-called ‘fat-finger trades’ in equity markets came down by over 99 per cent last month after stock brokers were warned by the income tax department and the capital market regulator and asked to follow strict criteria for changing client account details.
Changing of client account details due to ‘punching errors’ in updating trades had been a common practice among stock brokers in the country and this constituted a staggering Rs 56,000 crore worth of trade every month. However, this was down to Rs 120 crore last month.
The figures were disclosed by the Securities and Exchange Board of India Chairman U K Sinha at a public forum last Friday. Sinha said the situation was still not satisfactory yet and added he would like brokers to bring reporting of such errors further down.
Changing of client codes in 30 minutes after market close was a normal practice followed by brokers to rectify ‘genuine’ errors and mistakes that might have taken place during trading hours. The facility, however, was being misused and many brokers transferred gains or losses from one person to another by changing client codes, in the garb of correcting errors.
The Mumbai income-tax department has already slapped a Rs 2,000-crore notice on foreign institutional investors (FIIs) for not showing their investments. FIIs, in turn, have appealed against the I-T notice.
The notices were sent at the beginning of this year. I-T officials said they had found discrepancies between the trade data provided by brokers and the income reported by FIIs. It is believed that the cause of such discrepancies was changing of client codes at the end of the day’s trade.
FIIs, on their part, have told the I-T department 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 were also found in payment of securities transaction tax (STT) by FIIs, sources said. This also resulted in one of the stock exchanges not being able to collect a large amount of STT and other levies. Last Friday, Sinha also told reporters that outstanding recoveries of a leading exchange had gone up to Rs 12,000 crore. Following these incidents, Sebi had tightened the KYC and transaction data reporting norms for FIIs.
After the I-T notices, the Central Board of Direct Taxes (CBDT) had in March issued a circular alerting the exchanges about tax evasion through change in client codes. CBDT had also asked the exchanges to give data of client accounts changes in the recent past and in future.
Following CBDT’s concern, Sebi decided to impose penalty on brokers who indulged in unnecessarily changing client codes. Exchanges were asked to furnish transaction IDs, brokers’ names and IDs, original client codes, modified client codes, names of the original clients, PAN of original clients, name of modified clients, PAN of the modified clients, scrip names, quantities, rates, total value of transactions, buy or sell, and dates of transaction for codes modified during a month. However, this was only for the non-institutional category.
The regulator had advised stock exchanges to set objective parameters to identify client code modifications that were made due to genuine errors or wrong data entry.
The criteria, which now specifies errors in trade, include two broad parameters: If the original client code/name and modified client code/name are similar to each other, but such modifications are not repetitive; and if the original client code and the modified client code belong to a family. (Family in this case means spouse, dependent parents, dependent children and Hindu Undevided Family).
Stock exchanges have also designed a monthly penalty structure for client code modifications for non-institutional trades in the equity derivatives and currency derivatives segments. In addition to this penalty structure, suitable disciplinary action proceedings would be initiated in cases where the value of modified trades of non-institutional clients is significant.
