The finance ministry-appointed panel probing the National Spot Exchange Ltd (NSEL) issue is looking into cash transactions aided by brokers and the poor implementation of know-your-customer (KYC) norms. Officials familiar with the developments said the panel was also looking at how operations at the bourse largely remained out of the income tax framework — matching of client codes and permanent account number (PAN) and looking into suspicious transaction reports.
“The working group headed by the enforcement director will examine the violation, if any, of any laws and regulations by NSEL and its participants,” a ministry official said. The group comprises representatives from the Directorate of Revenue Intelligence, the Central Board of Direct Taxes, the Securities and Exchange Board of India (Sebi), Forward Markets Commission (FMC), etc.
Though the spot market in which NSEL operated came under the purview of state government departments and agricultural produce marketing committees, these entities didn’t focus on ensuring KYC compliance, matching PAN, etc.
“Nobody will admit it (cash deals). But as far as cheque payments are concerned, there are clear-cut rules in regulated markets under Sebi and FMC. These regulators have issued clear circulars on the obligations of the exchanges and their members (brokers). In addition, Sebi has a mechanism to check and match client codes with the PAN furnished. But none of these applied to NSEL,” a market participant said on condition of anonymity.
According to an August 2011 Sebi circular that laid down the documentation process for opening accounts, “self-attested copy of PAN card is mandatory for all clients, including promoters/partners/karta/trustees and whole-time directors and persons authorised to deal in securities on behalf of company/firm/others”.
The Income Tax Department had a direct hold on stock market transactions through the securities transaction tax paid by clients. From this year, even commodity futures markets are covered under the transaction tax. “NSEL claimed many of its clients were farmers. It would be convenient to say since farm income was exempt from taxes, they did not have PAN,” said the market participant quoted earlier.
An official at a regulated exchange said exchanges were mandated to conduct periodical inspections of members’ premises, adding KYC records were one of the records checked first during these inspections.
Agencies such as Sebi have mandates intermediaries to report cash transaction reports and suspicious transaction reports to Financial Intelligence Unit–India, which collates and processes the data. “The idea of KYC norms is to ensure the genuineness of the person doing the transaction. It will work only when the agency collecting the information also has regulatory control over the entity,” said a former Sebi official.
Sharad Kumar Saraf, convenor, NSEL Investors’ forum, said, “We have a running account with our brokers for several years now. The question of KYC doesn’t arise.” He added he didn’t have any idea about the probe.
Some brokers said the KYC procedures they followed for equity and commodity trades were the same. Deena Mehta, managing director, Asit C Mehta Investment Intermediates, said, “All our clients are KYC-compliant. We can establish a complete cheque trail. We follow the KYC norms mandated by Sebi for all other segments. We will be happy to give our clients’ KYC records.”