NSE To Charge Trading Members Penalty For ‘Abnormal’ Or ‘Non-Genuine Transactions’

India’s largest stock exchange will charge its trading members a penalty on the profit earned or loss incurred on “abnormal” and “non-genuine” transactions.

A penalty of 15 percent will be charged after following the due process and providing necessary hearing opportunity to the trading member for any clarification, the National Stock Exchange of India said in a Jan. 7 circular on its website.

The exchange has asked its trading members not to facilitate such transactions and put in place requisite systems to monitor such trades. The circular has come into effect immediately across all segments such as cash market, currency derivatives, equity derivatives and commodity derivatives, NSE said.

A circular in February 2019, following directions from the Securities and Exchange Board of India, had talked about disciplinary actions against the members.

That came after the markets regulator and the finance ministry raised concerns after a SEBI probe found alleged non-genuine transactions undertaken on the exchange platforms to avoid capital gains.

It is unclear when the penalty will be imposed or whether the exchange will hold settlement on such trades pending investigation. An email sent to NSE seeking clarification remained unanswered.

Members would require to follow the guidance note of Feb. 7, 2019, to identify such transactions, a senior exchange official told BloombergQuint on the condition of anonymity. But proving the transactions may be a challenge as a lot of external factors need to be examined before enforcing a penalty, the person said.

The February 2019 guidance note had listed the following scenarios that trading members need to watch carefully:

• Trading activity in a security or contract which is thinly traded with client squaring up the position within a short span of time.
• Client trading activity and profit or loss due to these transactions and their consistent contribution to the daily traded volumes of the security of contract.
• Fresh positions being created in the contracts very close to their respective expiry or on the day of expiry.
• Large quantities being traded during last half an hour which account for significant percentage to total traded quantity without change in beneficial ownership.
• Securities or contracts where the total traded volume of the client compared to the average daily traded volumes in that security or contract is significant.
• Additional emphasis on securities or contract where additional surveillance measures, graded surveillance measure, periodic call auction or trade for trade have been initiated.

In addition, the stock exchange has asked the trading members to ensure they have all documentary evidences like bank and demat statements of the clients.