Sikkim: Trade on MCX sees huge drop as ED launches investigation

Speculative commodity trading volumes worth billions of dollars on the Multi-Commodity Exchange (MCX) by Sikkim-based traders appear to have been wiped out following an investigation by the US government. State and Law Enforcement Branch. The market share of Sikkim-based traders in overall turnover on MCX fell to just 0.75% in April from 5.5% in February.

The probe was ordered after a report from Activity area April 4 revealed that Sikkim was being used as a tax haven by commodity speculators, who may also have been engaging in a money laundering racket. Reacting to this, Sikkim Chief Minister Prem Singh Tamang said he suspected that traders from other states might be using Sikkim residents as a front and therefore ordered the state vigilance department to dig deep into the scam.

Commodity speculation on MCX attracts 30% income tax, but as residents of Sikkim enjoy an exemption from Indian IT law, they were used by traders from other States. The 5.5% share of Sikkim traders on MCX translated into volumes worth a whopping $6 billion in a single month and these trades have been on the rise for almost two years now. Another report from Activity area on April 25 also revealed that Sikkim traders on MCX were also granted stamp duty exemption.

KYC required

Documents related to the probe now show that the government of Sikkim and ED demanded KYC and other data from MCX regarding traders who played on MCX.

The documents show that two clients, including Valley Distributors LLP and JMVD Market Solutions, registered with brokers based in Delhi and Kolkata, emerged as prime suspects driving the majority of volume on Sikkim’s MCX.

According to the sources, the investigation so far showed that JMVD was a client of Pace Stock Broking and Valley Distributors’ account was at East India Securities. The Financial Intelligence Unit (FIU) is also investigating whether the exchange was required to file suspicious transaction reports and whether it had done so, the sources said.

Sources pointed out that one of the Sikkim Chief Superintendent of Police’s letters erred in demanding data from MCX Chairman Saurabh Chandra for a period between 2003 and 2019, while Sikkim’s volumes on MCX started increasing mainly in 2020.

Zero tax scheme

Sources claim that it has further been revealed that many High Frequency Traders (HFT) are using Sikkim as a base to trade on both MCX and other stock exchanges in Mumbai also due to the zero tax arrangement.

Some of these brokers involved in HFT trading from Sikkim have already been fined by market regulator SEBI for their role in the illegitimate use of colocation trading systems, the sources said.

Published on

May 08, 2022

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