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Informist, Wednesday, Jul 24, 2024

 

By Rajesh Gajra and Anjana Therese Antony

 

MUMBAI – Market participants are certain that the hike in the securities' transaction tax on futures and options trading will impact trading volumes. But they are divided over the extent of the impact of the move. Finance Minister Nirmala Sitharaman announced the hike, which comes into effect from Oct 1, in the full Budget for 2024-25 (Apr-Mar) on Tuesday. 

 

The securities' transaction tax is being raised 60?ch on options premium value and futures trade value. The tax has been hiked to 0.1% from 0.0625% of the options premium on the sale of options, and to 0.02% from 0.0125% of the trade value on the sale of futures.

 

The securities' transaction tax hike will be a burden for investors and will certainly impact the trading volume in the equity derivatives segment of the stock exchanges, Jitendra Motwani, partner at Economic Laws Practice, said.  

 

In the current financial year, till Wednesday, the total options turnover, based on premium value, on the National Stock Exchange was 55.46 trln rupees, and the total futures turnover was 162.82 trln rupees. In 2023-24 (Apr-Mar), the total options premium turnover on the NSE was 151.98 trln rupees and that of futures was 329.64 trln rupees.

 

According to Narinder Wadhwa, managing director of commodity derivatives brokerage SKI Capital, the securities' transaction tax hikes will have a dampening effect on proprietary desks of brokerages. This, according to some market players, is an important point because a chunk of trading volume comes from high-value and high-frequency individual investors. 

 

Wadhwa also said that the higher transaction cost will directly impact the proprietary brokers' profit margins, making high-frequency and large volume trading less profitable. This could lead them to scale back their trading activities, especially in strategies that rely on tight margins, he added.

 

In a report on Jun 3, Kotak Securities' institutional equities research team analysed equity derivatives trading turnover data and said that around 20% of individual traders are driving 90% of index options volume, and the balance 80% contribute only 10% of the volume. Index options make up for the bulk of all trading volume in the equity derivatives segment of the NSE and BSE.

The high skew in trading activity towards a small share of active traders meant that if the stock market regulator wanted to limit access of retail participation in risky derivatives trading, then it "may not yield the same results as reducing the volume of premium traded," Kotak Institutional Equities said in the report.

 

Some market participants said it is difficult to analyse the quantum of impact of the securities' transaction tax hike on trading volume in the derivatives segment for now. However, this will be a major disappointment for retail traders, S. Devarajan, head of technical and derivatives at Way2Wealth Brokers, said. Also, the return on investments of high-frequency traders or quant traders, who want to generate more volume, will decline due to this tax hike, he added.

 

Nithin Kamath, founder and chief executive officer, Zerodha Broking, one of the largest equity derivatives brokerages in the country, said in a post on X on Tuesday that if the idea was to cool down the activity in the markets, the securities' transaction tax hikes, along with capital gains tax increase, "might just do it." Kamath said his firm collected about 15 bln rupees of the securities' transaction tax on the trades of its clients in 2023-24 and for same level of the volumes the tax collection at new rates will increase to 25 bln rupees. 

 

Some analysts do not expect the hike in the securities transaction tax to have an adverse impact on the trading volume. "At present, F&O volumes are at all-time highs. The last time they increased the STT, there was a marginal impact and within a few months, volumes surpassed the previous highs," Vipin Kumar, senior technical and derivatives analyst at Globe Capital Market, said. Kumar also said there would only be a marginal impact on spreads of futures and options premiums due to the rise in the securities' transaction tax after the tax becomes effective on Oct 1. 

The chairperson of the Securities and Exchange Board of India, Madhabi Puri Buch, has recently opined that speculative activity in equity derivatives trading was not a productive activity. According to Vikram Kasat, head of advisory, Prabhudas Lilladher, it was probably the perception among regulators and government that the equity derivatives space had turned "overheated and speculative." The stock market's worst fears got realised with the securities' transaction tax hikes, he said in a note on Tuesday.

The government's timing in hiking the securities' transaction tax rates could not have been better from the perspective of receiving higher collections. "At a time when the equity indices are at an all-time high, the government has tried to take a share out of the growth and the profits earned by the investors from the capital market" through the securities' transaction tax and capital gains tax hikes, Nilesh Sharma, president and executive director, SAMCO Securities, said in a note on Tuesday.  End

 

Edited by Aditya Sakorkar

 

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