BSE takes measures to plug tax evasion, money laundering; deep out-of-money contracts were used by entities to convert black money into white

BSE takes measures to plug tax evasion, money laundering

Ashwin J Punnen

16 August 2015

Financial Chronicle

The Bombay Stock Exchange (BSE) is putting in place a series of measures to prevent use of its exchange platform by various unscrupulous entities to evade taxes and launder money. These measures include putting additional circuit filters on stocks that are susceptible for price manipulation and reducing the number of out of the money option contracts. The exchange recently put weekly, monthly, quarterly and yearly circuit filters on about 4000 stocks that are exclusively traded on the BSE and stocks listed on its SME and SME ITP platform. The exchange has also reduced the number of strikes in an option contracts available for trading from seven to three after it has found that deep out-of-money contracts were used by entities to convert black money into white.“We are putting in place a number of measures to curb tax evasion apart from heightened surveillance measures,” says Ashish Chauhan, BSE MD & CEO.

These periodic price bands are expected to prevent excessive price movement in stocks.

The exchange is now taking preemptive steps to curb price manipulation as the market regulator SEBI had cracked down on hundreds of entities that were using the exchange platform for tax evasion. They had used ingenious schemes to evade tax by jacking up prices after making preferential allotment to connected entities and take advantage of exemption on long-term capital gain.

With new circuit filter mechanism, a stock having daily price band of 20 per cent could move a of maximum 60 per cent in a week, while in a month it can move upward or downward up to 100 per cent and 200 per cent in a quarter. The maximum movement for the stock in a year is restricted to 400 per cent.

BSE Spokesperson said, “The new weekly, monthly, quarterly and annual price bands have been devised to contain volatility in the prices of stocks across long period which is expected to ensure improved price formation and better regulatory oversight. The improved long duration price band framework is also expected to help eliminate tax avoidance schemes that have come to light recently and also help eliminate price manipulation in Indian markets making them more robust over a longer period.”

“The new circuit filters aim to curb steep price movements within short intervals and thus protect investor interest even better,” said Mahavir Lunawat, managing director of Pantomath Capital Advisors.

The BSE has also decided by to reduce the number of options contracts which are out of money to a minimum so that the exchange traded derivatives mechanism is not used for the purpose of tax avoidance or similar purposes.

It has restricted options contracts with three strikes with one at the money, one out of the money and one in the money.

It was found that some players were buying deep out of the money contracts to book loss to set off capital gains. This is a precautionary step taken by the BSE to adhere to the best in class standards for products and governance.

“Sensing the ingenuous ways that market participants have been using the exchange trading mechanism for money laundering, the BSE has tightened measures and made things that much more difficult. Coupled with surveillance and constant monitoring this issue is being further dealt with,” said Arun Kejriwal, director of KRIS Research.

The BSE has recently written to the government to do away with the exemption of capital gains tax on securities to discourage people from misusing exchange platform for money laundering.

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