As the current fiscal nears its end, Sebi has stepped up its surveillance to check tax evasion attempts through ‘arbitrage’ and bogus losses using stocks and mutual fund investments.
Towards the end of every financial year, the manipulators tend to devise new ways of tax evasion, including incurring ‘losses’ from stock market trades and offsetting that against their capital gains booked earlier in the fiscal.
Besides, there are also attempts to make temporary investments in mutual funds and other financial instruments providing tax benefits towards the end of a financial year, which get re-routed back to the investors soon after the new fiscal begins, a senior official said.
Sebi has also stepped up its vigil against illicit ‘arbitrage’ through derivatives trading from offshore locations, as also for any misuse of ‘client code modifications’, he added.
The regulator has already clamped down on a number of high-profile cases following such a modus-operandi in the past while it is now also concerned about the misuse of mutual fund platforms for tax evasion attempts in fiscal-end periods.
The Securities and Exchange Board of India (Sebi) is already investigating some suspected cases of tax evasion by way of ‘arbitrage’ between bogus losses shown in the Indian market and the ‘gains’ at offshore locations.
Such arbitrage could have taken place through trades in currency as well as equity derivatives, sources said, while adding that the modus-operandi typically involved payments being made for ‘bogus losses’ in Indian markets and ‘huge profits’ at overseas locations.
With regard to the client code modifications, several cases had come under the Sebi’s scanner that took place between 2009 and 2011 after which the regulator tightened its norms to check such manipulations.
Before tightening of the norms, the Indian markets saw client code modifications to the tune of Rs 50,000-60,000 crore a month, which came down to just about Rs 100 crore soon after Sebi’s action.
This is believed to have further come down, sources said, while adding this shows that a large-scale manipulation was taking place where brokers were making changes in the client details after execution of trades citing ‘genuine errors’.
Modification of the client codes is a practice under which brokers change client details in sale and purchase orders of securities after the trades are conducted. While it is legally permitted to rectify inadvertent errors in punching the orders, there were concerns that such modifications could be misused for manipulative activity in the market.
An earlier probe also showed that the quantum of such modifications was much higher in March compared with the other months, which hinted at the tax evasion angle as it’s the last month of the fiscal.