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SEBI plans to mitigate market risks by linking trading volume to individual’s tax return.
Individual investors are presently required to disclose only their net worth to their brokers periodically
The market regulator SEBI is planning to make trading even more secure by adopting a process of calculating an investor's financial strength based on his income tax return, a by Times of India said.
TK Vishwanathan-headed Sebi committee is expected to recommend this, the daily said quoting sources.could not independently confirm the information.
Currently, individual investors are required to disclose only their net worth to their brokers periodically, without submitting any document.
If this suggestion is taken forward, SEBI will consult with market intermediaries in detail about the ITR-based income declaration for traders.
The market regulator aims to curb risks while trading in stock and derivative markets with this move and if it goes through, its implementation should take a few months, it said.
Presently, an investor opening a demat account has to provide his net worth by ticking one box against levels of income given starting with below Rs 1 lakh and going up to above Rs 25 lakh. The estimate of the investor’s net worth should be given on a date not more than a year before the date of opening the account.
An individual investor can trade freely and engage in the stock and derivative markets based on his financial strength, due to a recently approved provision by the regulator. If one wishes to trade beyond that limit, their broker will need to check their financial position before entering trade in higher limits.
Experts from the fields said that brokers let their clients declare their net worth that is much higher than the actual levels to get higher commissions. Such higher trading volumes are funded by the same brokers who take commissions as well as interest income from such funding. Such practices increase risk in the markets, which is why Sebi will ask investors to provide their ITR while opening trading accounts with brokers.
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