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With lowering of short-term capital gains tax — Illiquid stocks in for price manipulation?

Virendra Verma

Last year, when there was sudden spurt in large number of illiquid stocks, stock exchanges in consultation with SEBI had to move several scrips to trade-to-trade segment to avoid manipulation.

Mumbai , July 10

EVEN as small and retail investors are happy with the lowering of short-term capital gains taxes, the new provision in the Union Budget might lead to increased manipulation in illiquid stocks.

According to stock brokers, the present 30 per cent short-term capital gains tax was not providing much incentive for these players, but the lowered taxes are likely to lead to increased manipulation.

The modus operandi is that a group of market players will start jacking up the stock price of an illiquid company and after appreciation of 100 to 200 per cent they will exit from the shares and book profit. On this profit they will pay 10 per cent tax. For example, if a stock is trading at Rs 5 and it increases to Rs 15, the profit will be Rs 10 and on this 10 per cent tax works out to Re 1, while on 30 per cent tax bracket, the tax outgo is Rs 3.

"In the past we have seen spurt in illiquid stocks and large number of investors stuck with these shares. With more than 5,000 scrips listed on BSE, the possibility is that more stocks might be manipulated," said a top official of a domestic broking firm catering to large number of retail investors.

At present, on an average 1,800-1,900 scrips are traded on BSE and out of them most of the trading is in top 500 scrips.

A broker said that last year, when there was sudden spurt in large number of illiquid stocks, stock exchanges in consultation with SEBI had to move several scrips to trade-to-trade segment to avoid manipulation. "This trend (spurt in price of illiquid stocks) could be seen again after the provision in the Finance Bill is passed," he said.

To avoid the situation, brokers said the government should make some provision like making some stocks ineligible for short-term capital gains or setting minimum market capitalisation for being eligible for 10 per cent tax.

In last year's Budget, the then Finance Minister, Mr Jaswant Singh, had made a provision of exemption from long-term capital gains tax on securities that are part of BSE 500 index.

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