SEBI may curb excessive derivative speculation to boost tax collection

Capital market regulator SEBI is seeking major changes to the structure of equity trading in India, evidently driven by the government’s recent realisation that it may be losing chunks of tax revenues due to a high concentration of equity trading volumes in the derivative segment.

SEBI may soon announce measures to boost cash equity volumes and curb excessive derivative speculation, two sources close to the regulator told BusinessLine .

India’s emergence as the second-most speculative equity market globally — due to derivative trading — after South Korea, has rattled the government and SEBI.

A recent study showed that the ratio of equity derivative turnover to cash segment turnover stood at 15.2:1. That is, more than 15 trades in derivatives were being conducted for every cash market trade.

Sources say the fact that derivative trading was way higher than cash was causing heartburn in the Prime Minister’s Office and the Finance Ministry as the government derives a lion’s share of taxes from the latter segment.

The average monthly derivatives-to-cash-turnover ratio jumped to 18.6:1 in April and touched a peak of 20.2:1 in May, something which may impact Securities Transaction Tax (STT) collections.

Tax collection trends suggest that any surge in cash volumes could see a manifold push in STT collection.

For instance, data shows that 67 per cent of the ₹7,350-crore STT collected during financial year 2015-16 came from the cash segment.

The trend has been similar for many previous years.

The cash segment has an average contribution of over 60 per cent in the government’s STT collection despite accounting for less than 10 per cent of overall equity trading.

Data also suggests that any rise in STT collection is directly proportional to the increase in cash market volumes.

Since 2008, the combined equity trading turnover on domestic exchanges saw 20 per cent compounded growth every year.

This was mainly due to a push from derivative turnover that saw 24 per cent compounded growth in 10 years.

Comparatively, the cash segment saw compounded growth of a measly 0.7 per cent and so did the STT collections, which rose 0.6 per cent every year since 2008 on a compounded basis.

On July 12, SEBI floated a discussion paper with the objective of “orderly growth, development and alignment of both cash and derivative markets.”

But the ball was set rolling by Prime Minister Narendra Modi in December 2016 at a SEBI function where he commented that equity markets were contributing less to tax collections, and promised “sound and prudent policies and reform measures for increasing tax contribution from various market participants in a fair, efficient and transparent way.”

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