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.

Which of the following sentences is true according to the passage?

Options

• Brokers are no longer allowed to show their errors for an order that has been placed for a wrong client and are to be penalized by the stock exchanges.

• SEBI has placed a fixed penalty on brokers transferring their non-institutional trades from one account to the other.

• SEBI will allow transfer of trades in cases where an order has been placed for a wrong client.

• It is an open practice for people to approach brokers to show losses in their stock trading accounts.

Answer 1

SEBI will allow transfer of trades in cases where an order has been placed for a wrong client.

Explanation:

SEBI will allow transfer of trades in cases where an order has been placed for a wrong client is the correct answer and has been mentioned in the last paragraph. 

Brokers are no longer allowed to show their errors for an order that has been placed for a wrong client and is to be penalized by the stock exchanges is incorrect from the information in the last paragraph – the stock exchanges are to penalize brokers transferring their non-institutional trades from one account to the other, however, there is no information to suggest that brokers cannot show these errors.

SEBI has placed a fixed penalty on brokers transferring their non-institutional trades from one account to the other is incorrect as it is mentioned in the last paragraph that Sebi has imposed two different levels of penalty - the penalty is not fixed.

It is an open practice for people to approach brokers to show losses in their stock trading accounts is also incorrect according to the first line of the second paragraph. The practice is secretly operated and not an open one.