Question

Direction : The passage given below is followed by a set of question. Choose the most appropriate answer to each question.

With an aim to check flow of black money and evasion of taxes through stock market, market regulator SEBI has decided to impose hefty penalty on brokers facilitating such transactions from tomorrow. The regulator recently came across a loophole in its existing regulations, which was being abused by stock brokers for facilitating tax evasion and flow of black money through fictitious trades in lieu of hefty commissions. To remove this anomaly, SEBI has asked stock exchanges to penalise the brokers transferring trades from one trading account to another after terming them as ‘punching’ errors. The penalty could be as high as 2% of the value of shares traded in the ‘wrong’ account, as per new rules coming into effect from August 1. In a widely-prevalent, but secretly operated practice, the people looking to evade taxes approach certain brokers to show losses in their stock trading accounts, so that their earnings from other sources are not taxed. These brokers are also approached by people looking to show their black money as earnings made through stock market. In exchange for a commission, generally 5-10% of the total amount, these brokers show desired profits or losses in the accounts of their clients after transferring trades from other accounts, created for such purposes only. The brokers generally keep conducting both ‘buy’ and ‘sell’ trades in these fictitious accounts so that they can be used accordingly when approached by such clients. In the market parlance, these deals are known as profit or loss shopping. While profit is purchased to show black money as earnings from the market, the losses are purchased to avoid tax on earnings from other sources. As the transfer of trades is not allowed from one account to the other in general cases, the brokers show the trades conducted in their own fictitious accounts as ‘punching’ errors. The regulations allow transfer of trades in the cases of genuine errors, as at times ‘punching’ or placing of orders can be made for a wrong client. To check any abuse of this rule, SEBI has asked the bourses to put in place a robust mechanism to identify whether the errors are genuine or not. At the same time, the bourses have been asked to levy penalty on the brokers transferring their non-institutional trades from one account to the other. The penalty would be 1% of the traded value in wrong account if such trades are up to 5% of the broker’s total non-institutional turnover in a month. The penalty would be 2% of trade value in wrong account if such transactions exceed 5% of total monthly turnover in a month.

It can be inferred from the passage that

विकल्प

• brokers with fictitious accounts are approached by clients who want to buy a ‘profit’ or a ‘loss’ deal.

• clients ask brokers to create fictitious accounts that can be used for both ‘buy’ and ‘sell’ trades.

• clients approach brokers to create fictitious accounts that can be used for a “profit” or a “loss” deal.

• clients approach brokers with fictitious accounts and vend a “profit” or “loss” deal.

Answer 1

brokers with fictitious accounts are approached by clients who want to buy a ‘profit’ or a ‘loss’ deal.

Explanation:

The third paragraph explains the procedure that brokers follow in order to help their clients to show black money as earnings or to evade tax. The paragraph clearly mentions that brokers keep conducting “buy” and “sell” trades in their own fictitious accounts. They then use these accounts when the clients approach them. The paragraph also states that clients approach brokers in order to purchase a profit or a loss deal. 

Brokers with fictitious accounts are approached by clients who want to buy a ‘profit’ or a ‘loss’ deal is correct.

Clients ask brokers to create fictitious accounts that can be used for both ‘buy’ and ‘sell’ trades is eliminated as it is clear from the information in the passage that brokers themselves create the fictitious accounts for potential clients.

Clients approach brokers to create fictitious accounts that can be used for a “profit” or a “loss” deal can also be ruled out on this basis.

Clients approach brokers with fictitious accounts and vend a “profit” or “loss” deal is incorrect because it suggests that the clients sell (vend) a “profit” or “loss” deal. However, from the information in the passage, this is untrue.