Market regulator SEBI has held the Multi Commodity Exchange (MCX) guilty for its failure to detect irregularities in the know your client (KYC) filings by trading members who were using the State of Sikkim to trade on the exchange platform.

The story that the tax-free State of Sikkim was generating $6-billion worth of monthly volumes on MCX and had become a haven for commodity market speculators was first reported by businessline on April 4, 2022, which led to multiple investigations not only by SEBI but also by the Enforcement Directorate, Income Tax department and Sikkim State authorities.

Misusing tax exemption

Native citizens of Sikkim enjoy special tax exemption granted to them by the Central government. businessine had reported that a few brokers were misusing this scheme and generating huge volumes on MCX to save stamp duty and other taxes. Data showed that in February 2022, the market share of Sikkim-based traders on MCX in Mumbai climbed to 5.5 per cent from nil just over a couple of years ago. MCX witnessed a total volume churn of over $110 billion on its platform during February, of which Sikkim’s share stood at over $6 billion. The number of traders from the State, based on unique client code (UCC), had increased to 2,217 compared with 674 in February 2020.

SEBI investigations found that MCX failed to detect irregularities during on-site/off-site supervision of trading members and/or by having necessary system-based validations/alerts while uploading client information in an UCC database. Investigations revealed that brokers, even though trading from Sikkim, had mentioned some other State in the KYC documents of their clients.

SEBI has imposed a fine of ₹6 lakh on MCX. Experts say MCX is most likely to have earned a high amount of revenues from transaction charges it collects on the trades. 

Prima facie it was a malafide intent of Trading Members to get stamp duty exemption by taking advantage of MCX circulars, which led to loss to exchequer,” the SEBI order said.

“While the noticee (MCX) has now initiated verifying and confirming existing and new Sikkim-based accounts and carry, the exchange was obligated to carry-out the same earlier, as per SEBI circular. The purpose of CKYC/eKYC is to have a single version of the truth of investors’ details,” the SEBI order said.