A large number of brokers and traders have come under the scanner of the Income Tax Department for alleged non-genuine trades in the BSE’s equity and currency derivatives segment to generate artificial gains or losses to evade taxes.
On December 3, the I-T Department carried out search and survey operations across 39 locations in the country, including Mumbai, Kolkata, Kanpur, Delhi and Ghaziabad.
While the search operations resulted in the seizure of ₹1.2 crore in unaccounted for cash, the Department believes the fraudulent trading had led to “unscrupulous entities” registering artificial gains or losses amounting to over ₹3,500 crore.
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"... the Income Tax Department carried out search and survey operations on certain share-brokers/traders who were involved in facilitating accommodation of profits/loss through reversal trades in illiquid stock options in Equity Derivative Segment and also Currency Derivative Segment on Bombay Stock Exchange (BSE),” the Finance Ministry said in a statement.
Further, while the search operations resulted into seizure of unaccounted cash to the tune of ₹1.20 crore, the tax department believes that the fraudulent trading has led to “unscrupulous entities” registering artificial gains or losses amounting to over ₹3,500 crore.
”The search/survey action has also resulted in identification of the wrongful long-term capital gains taken in at least 3 penny stocks listed on the BSE, where the manipulated profits utilized by the beneficiaries aggregate to around ₹2000 Crore,” the Ministry statement said, adding that the number of beneficiaries benefiting from such manipulated transactions runs into “few thousand scattered across India”.
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Incidentally, this is not the first time that such actions of traders and brokers have come under the scanner of a government body or a regulatory agency.
The Securities and Exchange Board of India (SEBI) has fined hundreds of entities in the last one year for such fraudulent trades.
The SEBI probe was initiated after the regulator found large instances of trade reversals between during 2014 and 2015.
As per a SEBI order, more than 80% of all trades during that period saw individuals reversing their buy or sell position to generate artificial volumes and prices.
Modus Operandi
Since the derivative contracts are illiquid — not much traded — entities can collude and transact at a pre-decided price.
Typically, in the transactions that have come under the I-T scanner, entity A sells the contract to entity B at a pre-determined price. Thereafter, A buys back the contract at a pre-decided higher price from B to register artificial profits while B will register losses. Moreover, the losses are made good by cash dealings as per the arrangement between the buyer and sellers.
SEBI probes have revealed that such arrangements are entered into to convert black money into white by fraudulent trades on the exchange platform. Such artificial losses are also used to offset genuine gains to lower the overall tax liability.