Surveillance has many aspects, and for me, the most important is price surveillance where we use social media and bots.
By Urvashi Valecha
As technology progresses at a rapid pace, going forward, there will be a lot of economic earthquakes and volatility will be very high for the next three-four decades, said Ashishkumar Chauhan, MD & CEO of BSE. In an interview with Urvashi Valecha, he further said the current Securities Transaction Tax (STT) implementation is uneven as it tends to promote speculation because STT is highest on delivery-based derivatives and lowest on options. Edited excerpts:
We recently saw Karvy Stock Broking taking loans by pledging their clients securities. What are the exchanges doing to protect investors from such eventualities?
These are issues that surface from time to time and as soon as they are known, steps are taken to rectify them. In the last few months, several regulations have been announced by the regulators. Most of the regulations announced are outcomes of what had happened in several brokerage houses over the last six months where irregularities of massive scale were understood and analysed. Sebi has given some time for the industry to adhere to the new regulations.
What are the measures in terms of surveillance being taken after the Karvy crisis?
Surveillance has many aspects, and for me, the most important is price surveillance where we use social media and bots. If the information is out in the public domain and not on the BSE, we immediately ask questions to the companies, and they do respond. But now, this has improved and become automated. To ensure that the wrong people don’t give any news through a third party, checks and balances have been reinstated. Again on the brokers side, we have strong inspections related framework. Some funding-related issues that were not focused on, will now be incorporated in the surveillance.
Do you think Long Term Capital Gains Tax (LTCG) should stay?
When LTCG was removed and STT (securities transaction tax) came in, you could take STT as an expense under the income tax Section 88E. But that was also removed later in 2008, creating huge friction in the trading process and reducing liquidity in the underlying spot markets. It ended up creating a situation where a perception was made that the stock market is getting used for tax evasion which is against the purpose of the stock market.
Whenever you have a new tax or remove a tax, the business gets used to it and creates situation to avoid or evade taxes where feasible. It is called tax arbitrage. However, if you want a healthy capital market you should create a situation where a lot of people come in the markets for the right reasons, that is, investments and not tax evasion. The background which allowed STT to be introduced has gone away and hence STT needs to be removed.
The government needs to collect money in form of taxes to run its operations in any modern society. Now that LTCG has been imposed should STT not go? Current STT implementation also is uneven. It tends to promote speculation. It is highest on delivery based derivatives and lowest on options. Based on this uneven implementation of STT, if you look at the numbers today, the options are now trading 90-92% of the market. 6-7% are futures and just 2-3% is equities trading or cash market. From 2008 to 2020, options have taken over because on a notional amount basis they have STT which is one hundredth of futures. So, everyone has gone to the lowest cost activity. Within the same framework also, which is commodities versus equity derivatives, if there is differential STT (CTT), you will see people move towards that.
Longevity of companies coming into the index has come down, and the churn in the index has gone up substantially. How does it impact investor behaviour?
I think volatility will be very high in the next three-four decades. We may come across a situation where many companies will become large and many will disappear.
The technology’s tectonic plates will move so fast that there will be a lot of economic earthquakes. For retail investors, it will be required then to understand the trends. Many of us think buying in the morning and selling in the afternoon is an investment, but it is not investment. Long-term investments are becoming way too complex because too many areas are seeing too many changes in a short time and many older areas are becoming irrelevant.
So, as a retail investor, you need to tie up with the like-minded people who have different understanding, or take the services of portfolio management service.
Investors who don’t have time to look at their investments can invest in mutual funds. But if investors want pure market returns, they can also look at exchange traded funds (ETFs) or index funds, which is called passive investing.