The speculative commodity trading volumes worth billions of dollars on the Multi Commodity Exchange (MCX) by Sikkim-based traders seem to have been wiped out on the back of a probe by the State government and Enforcement Directorate. Market share of Sikkim-based traders in overall turnover on MCX has declined to just 0.75 per cent in April from 5.5 per cent in February.

The probe was ordered after a report by BusinessLine on April 4 revealed that Sikkim was being used as a tax haven by commodity speculators, who were possibly also indulging in a money laundering racket. Reacting to it, Sikkim Chief Minister Prem Singh Tamang said he suspected that traders from other States could be using Sikkim residents as a front and hence ordered the State vigilance department to dig deep into the scam.

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Commodity speculation on MCX attracts 30 per cent income tax but since Sikkim residents enjoy exemption from India’s IT Act, they were being used by traders from other States. The 5.5 per cent share of Sikkim traders on MCX translated into volumes worth a massive $6 billion in a single month and such trading has been on a rise for nearly two years now. Another report by BusinessLine on April 25 also revealed that Sikkim traders on MCX were also enjoying a stamp duty waiver.  

KYC demanded

Probe-related documents now show that both Sikkim government and the ED have demanded KYC and other data from the MCX with regard to traders who were playing on MCX.

The papers show that two clients including Valley Distributors LLP and JMVD Market Solutions, registered with Delhi and Kolkata based brokers, have emerged the key suspects who were generating the majority of the volumes on MCX from Sikkim.

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As per the sources, the probe so far has shown that JMVD was a client of Pace Stock Broking and the account of Valley Distributors was with East India Securities. The Financial Intelligence Unit (FIU) is also probing if the exchange was required to file suspicious transactions reports and if it had done so, the sources said.

Sources pointed out that one of the letters from Sikkim’s Senior Superintendent of Police has erred in demanding data from MCX chairman Saurabh Chandra for a period between 2003 and 2019 while the volumes from Sikkim on MCX started going up mainly in 2020. 

Zero tax arrangement

Sources say that it has further come to light that many high frequency traders (HFT) were using Sikkim as a base to trade on both MCX and other equity exchanges in Mumbai too due to the zero tax arrangement.

Some of these brokers who are involved in HFT trading from Sikkim were earlier fined by market regulator SEBI for their role in illegitimate use of co-location trading systems, said the sources.