Wily traders, brokers, and other market participants have been taking the ‘prop’ route to dodge Securities and Exchange Board of India (SEBI) margin rules, and evade Goods and Services Tax (GST) and Income Tax (I-T). Prop trading, a practice that has been around for some time in India, involves a trader taking a position in the market for his own account and not for a client. Prop traders are typically not registered as a broker or a sub-broker, and do not have to adhere to margin rules and other regulations.
Prop traders can also dodge GST and I-T by not registering as a business entity. This helps them to avoid the scrutiny of regulatory bodies such as SEBI, GST, and I-T, as well, from multiple sources in the market. This is being done by client trades being passed off as ‘proprietary’ trades-prop trades as they are called in market parlance- meaning trades done by the broker in his own book and not for the client.
Prop traders use the money of their friends and family to trade in the markets, and they charge a commission or a fee for their services. The money they make is then split between the prop trader and his ‘investors’. Prop traders can also manipulate the markets by using their access to inside information or by creating false demand or supply in the markets. SEBI is now taking steps to clamp down on prop trading by introducing stricter rules.
Also, there is no brokerage applicable to proprietary trades. This means, there won’t be any GST applicable either, since GST is a percentage of brokerage. Or for that matter, any government levies based on the brokerage charged. None of it comes free though, the broker will charge for that in cash. This means a revenue loss for the government.
Sources say that brokers are exploiting an ambiguity in stock exchange regulations that does not limit the number of trading terminals/user-ids they can avail of. Brokers avail connections in excess of what they would otherwise require, and then share the user-id and passwords with their preferred clients, allowing them to put in trades. This is in violation of stock exchange rules which stipulate that the trading terminals are required to be under the direct control of the trading member and be managed either by an authorized employee or by an approved authorized person of the trading member.
