5 commodity brokers under ED radar for exploiting RBI's overseas remittance scheme

The Enforcement Directorate is probing commodity brokers with subsidiaries in Dubai and other countries for allegedly exploiting the RBI’s overseas remittance scheme. The agency has begun preliminary investigations against five such brokers, sources told Moneycontrol.

These commodity brokers allegedly evaded taxes by misusing the liberalised remittance scheme or LRS under which all resident individuals, including minors, are allowed to freely remit up to USD 250,000 per financial year (April – March) for any permissible current or capital account transaction.

As per the Foreign Exchange Management Act, an individual or company is prohibited remittance from India to cover margins or margin calls of overseas exchanges / overseas counterparty. There is also no provision of remittances for the purchase of FCCBs issued by Indian companies in the overseas secondary market or for trading in foreign exchange abroad.

A senior official of the Enforcement Directorate told Moneycontrol “We have initiated preliminary investigations against 5 commodity brokers that are based in the country but have started offices in another country. We have clues this was just for evading taxes.”

Another source privy to the development said, “In the initial investigation, we found these commodity brokers executed one trade in the domestic market and undertook trades of the same value in a tax haven country, mostly Dubai. Trades were executed in a way that the overseas trades showed a profit, and the domestic ones showed a loss. That way, there will be no need to pay taxes. These trade are a violation of the FEMA Act and are under the net of the ED.”

Last month, the Commodity Futures Trading Commission (CFTC) identified such trades by a company named Arab Global Commodities, a proprietary trading firm headquartered in Dubai with several trading offices in India.  Arab Global Commodities was engaged in a disruptive trading practice called “spoofing” in the copper futures contract traded on the Commodity Exchange, Inc. (COMEX) between March and August 2016. The CFTC order found that AGC engaged in this activity through one of its employees (say Trader A), who generally spoofed after business hours from home. The order finds that over the course of several months, Trader A repeatedly traded using the same spoofing pattern placing one or more large orders (typically more than 100 contracts) on one side of the book, while he had a small resting order (typically fewer than 10 contracts) on the opposite side of the book. He immediately cancelled the large order(s) when his small order got filled. On some occasions, CFTC found that Trader A used another AGC trader’s account to hide his spoofing.

A person familiar with the developments said, “Commodity brokers have got a sense of an investigation by the enforcement directorate and it is one of the reasons for lesser participation in commodity market especially in Multi Commodity Exchange (MCX).”

A former exchange official said at this point of time most of the volume in evening session might be a result of two-legged trades, one in the domestic market and the other in the overseas market.

Income tax experts say that on a consolidated basis these companies have to pay taxes in the domestic market.