Stock markets cannot be allowed to be misused by manipulators for evasion of taxes and the BSE has put in place a strong surveillance mechanism to check any such misdeeds, the exchange's CEO Ashish Chauhan has said.
He also urged the government to have a fresh relook at the laws for further tightening of rules and removing the loopholes in the capital gains tax exemption framework to completely stop any tax evasion through stock market trading.
In an interview to PTI, Chauhan also said there is a widely held perception that only penny stocks are manipulated for tax evasion, but there was a need to study whether larger stocks are also used for such misdeeds as 80-90 per cent of capital gains tax exemption being claimed were from the larger companies.
In the annual budget this year, the government announced a major step to check tax evasion through penny stocks by limiting the long-term capital gains tax exemption only in stocks in which purchase securities transaction tax (STT) was levied.
In case of shares purchased off-market or without levy of STT, the incentive would now be limited to only some genuine transactions such as IPOs and a few other cases.
Chauhan said it was a move in the right direction as such exemption would not be available any more for preference shares that were mainly used for evasion of taxes, but some more steps are required to fully check the loopholes.
There have been several cases that have come to light in recent years where penny stocks were used for tax evasion through manipulation in shares of thinly traded companies.
The BSE has been as such proactive over the years for delisting of stocks were no trades have taken place for a long time, after giving due time to those companies for compliance.
Talking about the menace of penny stocks, Chauhan said, "One thing is price manipulation and the other is the tax evasion. So, we have taken up it with the government that since you have this regulation of capital gains tax exemption after one year, which is promoting this kind of tax evasion behaviour, you should stop having this exemption."
"You should stop this exemption and that would stop price manipulation based on tax evasion. Then the normal price discovery would happen," he added.
"All the exclusive stocks (listed only on its platform), BSE would continue to apply tougher price bands on a quarterly or annual basis, compared to what the regulator prescribes.
"Traditionally, we have had a lot more penny stocks than others, so we need to be much more careful. We have ensured and we will continue to ensure that such issues don't come up in the future," Chauhan further said.
Assuring that the BSE will keep taking up the issue of capital gains exemption with the government, he said "it is happening because of this reason and by allowing capital gains tax exemption, how much more capital has come into the markets, that also needs to be analysed".
"Whether the purpose has been served or not, some analysis needs to be done and also study the pros and cons of all this," he said.
Chauhan said the government has acted by stopping allowing the preferential shares for the benefit of this exemption.
"The largest amount of tax evasion was happening through that route and that has been blocked very well. We still believe that till the time you give that incentive, people would still attempt," he said.
Stating that the onus is on exchanges to not allow price to be manipulated, the BSE chief said it is also for the government to ensure that there are no such loopholes for the people to take advantage because exchanges are not equipped to handle tax evasion and they do not have that mandate.
"Still, we have created an interesting mechanism to not allow the price of a stock to go beyond a particular limit. Tax evasion can happen only if the prices go very high or very low," he said.
Chauhan said the BSE has put in place periodic price bands since September 2015, under which it has imposed weekly, monthly, quarterly and annual price bands to ensure that the stock prices do not go beyond a particular limit.
"For example, if a Rs 10 stock goes above Rs 40-50, the software doesn't allow it to move upward further. This will ensure that Rs 10 stock doesn't go to Rs 1,000 and come back. That has stopped a lot of such actions," he said, adding there is a perception that has got created that tax evasion happens only in the small stocks.
"It is easy to blame them, but larger stocks may also be used. Somehow, we seem to think that small companies are getting manipulated and large companies not have such issues. But if you study the amounts, you might find that 80-90 per cent of capital gains tax exemption, which is being claimed, is actually from larger companies," Chauhan said.
"It's just that we have got a convenient explanation and that all of us agree on without any analysis and we have taken action. That is not bad, as some action has been taken at least, but that doesn't mean that we need to keep this loophole open, " he added.