Higher penalties for modification; exchanges agree, could take effect next month.
The commodity derivatives market regulator, the Forward Markets Commission (FMC), will come up with new rules on client code modification by the end of this month.
According to two participants of FMC’s recently-held meeting with commodity exchanges on this issue, the revised guidelines are set to come in force by as early as October 1, to curb the rapid growth in such modification. In 2010-11 alone, commodity markets recorded modifications in total trade value of a staggering Rs 30,000 crore, compared to a minuscule amount the previous year.
The major changes are expected to be in the form of a reprieve for genuine mistakes. For example, in case of a typographic error, clients would incur no penalty in the revised guidelines, which is not the case now. With the existing guidelines, introduced on July 23, 2007, the FMC allowed intra-day client code modifications for 15 minutes after ending the session’s trade. The regulator also levied a minuscule penalty for all types of client code modifications.
According to an exchange official, any genuine error would be exempted in the new guidelines. But, the onus for proving the genuineness would be on the respective exchanges.
The FMC has asked commodity exchanges to give their suggestions by September 15. A majority of exchange officials have agreed to the FMC’s proposal to introduce new guidelines, with a significant increase in penal provisions.
Currently, the penal provision varies, depending upon the nature and quantum of trade. In the case of less than one per cent of client code change on total orders matched on a daily basis, the penalty was exempted.
On between one and five per cent of total matched orders, the FMC levied a penalty of Rs 500; it was Rs 1,000 on five to 10 per cent. The regulator also made a provision of a penalty of Rs 10,000 in case the percentage of client codes changed to total orders (matched) on a daily basis surpassed the 10 per cent mark.
In separate investigations about the usefulness of this order in the first three months of the current financial year, the FMC discovered various irregularities. It seemed most of the modifications were done for tax evasion purposes. In fact, traders readily paid the penalty for such changes, which made the practice legal.
To avoid such practices, the FMC has proposed to replicate penal provisions from the equity markets regulator, the Securities & Exchange Board of India (Sebi). On July 6 this year, Sebi imposed a penalty on trading members for modifying the client codes in non-institutional trades. The regulator directed exchanges to credit such penalty money to investor protection funds. Further, a trading member will have to pay a penalty of two per cent of the value of the non-institutional trade where client codes have been modified, if such trades account for more than five per cent of the total turnover of non-institutional trades. If it is more than five per cent, the penalty would be one per cent.
According to the current norms, trading members can modify client codes after the execution of the trade to rectify a genuine error that had occurred while entering a client code at the time. Understandably, the tax authorities had issued notices to large traders for modifying codes frequently, assuming they had evaded transaction and other taxes.
