The turnover in the cash market, comprising the intra-day as well as delivery- based trading, has hit new lows in December this year. While the average daily turnover in the cash segment has been declining since the start of 2011, at R10,161 crore for December, it is now at its lowest levels since March 2009. The bellwether Sensex has fallen 25 % since the start of the year and is nearly 37% down in dollar terms, thanks to the sharp depreciation of the rupee. In March 2009, when the markets were starting to recover, post the Lehman crisis, daily cash volumes had hit R10,140 crore.
Apart from the difficult macroeconomic conditions that have kept foreign institutional investors (FIIs) away and resulted in an erosion in market capitalisation, high transaction costs in the cash segment compared with those for the F&O segment, have kept investors away. The steep fall in prices of small cap stocks has also hurt volumes; the BSE Mid Cap index has given up 34% this year while the BSE Small Cap index has yielded 43%.
According to a report by Motilal Oswal Financial Services, the cost of a trade in the cash segment, which is amongst the highest in India, pinches investors during volatile times. ?Taxes are maximum in cash delivery creating an obvious bias towards options,? notes the report.
Currently, STT (Securities Transaction Tax) at the rate of 0.125% is applicable for any cash market transaction (both buy and sell side) whereas for the derivatives segment, the STT is levied at the rate of 0.017% is applicable on a sell transaction, with differing treatments for futures and options. For futures while the entire contract value is considered for determining STT, for options the rate is applicable on the premium amount when an options is sold or exercised.
For cash market transactions, however, STT is calculated on the total value of the trade. The Securities and Exchange Board of India has indicated that it would review the STT.
Also, both, stamp duty and service tax charges are higher for delivery- based cash market transactions than that for derivatives. According to an estimate by MOSL, the total taxes on delivery-based cash market transactions are approximately 0.17% of the value of a transaction.
Experts have highlighted how the tax differential due to the calculation of STT for a cash segment transaction against that of the derivative section transaction could be keeping the retail investors away from the market, especially in the current market conditions. Nirmal Jain, chairman, India Infoline had opined that STT is flawed given its varied construction and application.
?STT is one of the key issues that needs to be addressed for improving the liquidity in the cash market,? Jain said.
