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  • Nation Loses Billions As Futures Trading Manipulated For Tax Fraud.

    Published on November 6, 2011

    By Our National Correspondent

    Photograph taken by Suresh Kumar for APNNEWS

    DR T N Seema -Member of Parliament( Rajya Sahba)

    Another multi-billion financial fraud that could compound the pathetic  plight of the beleaguered Congress-led UPA government at the Center which is under constant attack from every corner on account of multiple scams rocking the nation is out in the open. This time it is the commodity futures market is the suspect.  The total money involved could exceed that of the infamous 2G and the CWG scams put together.

    The commodity futures trading platform which the government has been trying to

    Professor K. V. Thomas Minister of State (Independent Charge) in the Ministry of Consumer Affairs, Food and Public Distribution

    project as an effective instrument to safeguard the growers and consumers from price volatility is accused of being used to swindle the country to the tune of  many billions, if not trillions.  Untill  Dr T N Seema  raised a question relating to the alleged   misdeeds in the futures market in the Rajaya Sabha during the last monsoon session of the Parliament,  no one payed any serious attention to the fraudulent activities happening in the commodity futures market that regulerly caused hefty monetary loses to the national exchequer.

    Dr.  Seema who has been seriously observing  the  for a while  raised a question in the House on the  blatantly misuse of commodity futures trading platform for tax evasion and other illegal economic operations.  She,  in a written question, had asked the minister for consumer affairs, food and public distribution (commodity market comes under the ministry),  “ (a) whether Government is aware of the reports that some of the commodity futures exchanges in the country are helping the tax evaders; (b) whether Government has carried out any probe into this allegation”

    The minster, Prof. K V Thomas, in his written reply had said,  “the commodity futures market regulator, Forward Markets Commission, has received complaints regarding alleged artificial volumes and tax evasion transactions in respect of some contracts listed in one of the National Exchanges.”  The minister further stated “the investigation in respect of the same is underway.  Based on the findings of the investigation, FMC will forward the information under Rule 13 of the Forward Contracts Regulation Rules, 1954 to the appropriate authority, i.e., Income Tax Department, apart from initiating action that could be taken in accordance with the provisions of the Forward Contracts.”

    According to informed sources the commodity futures trading platform has been increasingly used for tax evasion and recycling unaccounted money,  taking shelter unde  some  clauses of the Income Tax Act ( ( clause (d) of the IT Act 43 (5) came into effect from 1-4-2006.) permitting offsetting of speculative business profit against speculative loss. The commodity futures trading platform is being used  to book losses and transfer profits to different accounts created according to convenience.  Such transactions are generally known as Profit& Loss transactions or P&L. According to a trader P&L is being carried out through inactive or illiquid contracts (the commodity contracts that hardly have any participation) to evade  any trading risk.

    From the reply of the minister on tax evasion it was clear that the market regulator had received complaints on misuse of commodity futures trading platform for tax evasion.  However,  the P&L operations continue flourishing with little hindrance thanks to lack of powers to the market regulator to punish the offenders.

    As per the provisions of the existing Forward Contract Regulation Act the regulator has no power to prosecute the offenders who violate the FCRA. The regulator does not have any search or seizure powers which are essential if the culprits are to be brought to book.  This is evident from the reply of the minister that FMC can only refer its findings or information to the “appropriate authorities.”

    According to a legal expert  “the FCRA offenders have to be booked under various sections of IPC&Cr.PC.  The threat of criminal proceedings will prove an effective deterrent.”

    According to Dr. Seema there are specific instances to prove that fraudulent practices are rampant in commodity futures market and the those who involved are  happily continuing with the violations. “The chief of one of the national commodity exchanges had openly declared in the media that more than 80% of the volume of his exchange was through fraudulent means and  I raised this issue through a written question in the House. I am still to know from the minister what action was taken against the exchange and its chief.”

    Answering to her question the minister had said in his written reply that the exchange “has suspended 2 Members and expelled 8 Members for fraudulent trading. The Exchange has also levied penalty of Rs. 20.30 lakh on 58 members for non-genuine trades carried out by them.”

    “But the significant concern is why no action was contemplated against the exchange? The exchange is the key accused in the fraud. For,  the exchange controls the trading platform and no trading action can be done without the knowledge and approval of the exchange. The exchange is supposed to have a well set surveillance system to detect any fraud or manipulation in trading by its members. So, it is the exchange that has to be booked first for any such frauds and this has not been done.”

    Is this  what is happening in all the existing commodity exchanges in the country?  Are the volumes and turnover attained through fraudulent means?

    The total turnover of the commodity exchanges in the country has drastically shot up from 2006 onwards. In 2006-2007 it was Rs. 571,759 crores and the very next year the turnover surged to Rs. 2155 122. In 2008-2009 the total turnover was Rs 5248956.18 crore, in 2009-2010 Rs 7764754.05 crore and during 2010-2011 Rs.11948942.35 crore. The figures explain, there was a quantum jump in the turnover of the commodity exchanges from 2006(in April 2006 the clause was added in the IT Act).

    But there are two pertinent questions, how much of the volume have come by way of P&L?  How much money the nation would have lost by way of tax evasion during these years?

    There are allegations that the commodity futures market in the country has become “a den of speculators and they rig the market.  Normally in an organised market,  presence of speculators may be around 15-20%. But here in India it is the reverse. The speculators are dominating the market,” says an analyst.

    However, the market regulator has been reiterating that the commodity futures trading should be seen as a tool for price discovery and it would help the growers and farmers in hedging their risks.

    But Dr.Seema, a member of the parliamentary standing committee for consumer affairs, contradicts the claims of the regulator. “I don’t buy this argument. Hardly any farmer or grower participates in this market. Only speculators are the participants.  As of now futures trading platform is widely used as a tool to commit economic fraud.  There is hardly any effective system to insulate the market from manipulations. Futures trading, in its present form is harmful to the society and the nation. It is wrong to say the exchanges help price discovery. On the other hand they help only to rig the market.”

    To a larger extent her argument is acceptable.  There are clear evidences supporting futures prices fluctuations influencing physical market. It has been proved that the spot market reacts to the futures market price fluctuations. If the theory of price discovery on Indian commodity market is to be believed, then the possibility of the futures prices affecting the prices of the spot market cannot be dispelled.

    So it is a fact, that futures prices of illiquid contracts definitely affect the prices of those commodities and hence manipulative trading practices using commodity futures platform is largely responsible for irrational price fluctuations and unusual price rise promoting inflation.

    From the written answers of the minister to the member of parliament we can infer that the authorities are not unaware of the ongoing fraudulent practices in the market. The government is well aware that with the existing regulatory framework lacks powers for prosecution.  A regulator with little legal authority to punish or prosecute the offenders can never effectively counter  the frauds. As Hon. Justice  Saini has pointed out in the Kanimozhi bail plea case  “the entire community will be aggrived if economic offenders who ruin the economy of the state are not brought to book.”

    The only solution is creation of a legislation that empowers the regulator for effective policing. The regulator has to be given powers for prosecution and issue warrants against offenders. In the absence of an effective regulator the futures market in the country will continue to remain a gambling den, a tool for recycling black money and tax evasion.


    1 Response for “ Nation Loses Billions As Futures Trading Manipulated For Tax Fraud. ”

    • commodity trader says:

      May be what Seema said about illegal transaction is right. But its makes no sense in blaming market itself. She says “ardly any farmer or grower participates in this market. Only speculators are the participants. As of now futures trading platform is widely used as a tool to commit economic fraud”. So does it mean that its good to ban futures market!! Its madness. The best way is to allow huge participation like of Banks, FII etc. Also manipulation cant be done in international commodities like Gold, crude etc which derives price from global market.

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