SEBI May Restrain Excessive Derivative Speculation

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The Securities and Exchange Board of India is planning to curb the excessive derivative speculation. The market regulator wishes to bring major changes to the structure of equity trading in the country. The move has come in wake of the government’s recent realization that it is because of the high concentration of equity trading volumes in the derivative segment, which is leading to the major loss of the tax collection revenues.

We can expect several announcements of various measures by the capital market regulator to boost cash equity volumes in the times to come. These measures intend to restrain the excessive derivative speculation.

As per the stock market news, India has become the 2nd highest speculative equity market in the world which has happened due to the derivative trading. The first slot is occupied by the country of South Korea. This has led to a lot of consideration by the government and the Sebi as well.

As per a survey done recently, the derivative trading was found way higher than the cash trading. The ratio of equity derivative turnover to cash segment turnover was found to be 15.2:1 which means that more than 15 trades in derivatives were happening for one cash market trade. This has caused a lot of deliberation in the office of the Prime Minister and Finance Ministry as they are losing out a major share of the taxes.

In the month of April, the derivative trading was even higher with the average monthly derivatives to cash turnover ratio was found to be 18.6:1. Also in May, the same ratio was 20.2:1. All this is impacting the Securities Transaction Tax (STT) collections hugely. The Tax collection movements clarify that any flow in cash volumes sees a multiple push in STT collection.

According to the legal news India, 67% of the ₹7,350-crore STT which was collected during FY’ 2015-16 came from the cash segment. This trend has been on similar lines for many years.

Normally, the cash segment on an average contributes to over 60% of the government’s STT. Such is the figure even when the accounting is for less than 10% of overall equity trading. As per the trend, an increase in STT means an increase in cash market volumes and vice versa.

After witnessing such ratio, the board had issued a discussion paper in the month of July with the aim of orderly growth, development and alignment of both cash and derivative markets.

In the month of December last year, in an announcement Prime Minister Narendra Modi had said in a SEBI function, that the equity markets were contributing less to the STT tax collections. He had also made a promise to bring sound and prudent policies and modify the practices for increasing the tax contribution from various market participants which will be done in a fair, efficient and transparent way.

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