In the run-up to the Union Budget, investors in the derivatives market were worried as the signals weren’t great. In the previous few weeks, the regulator came down heavily on futures and options (F&O) traders and said that household savings were in danger.
The Economic Survey even labelled it as “gambling” and warned that “financial market growth was running ahead of economic growth”. Against this backdrop, the government’s decision to impose a higher securities transaction tax (STT) — from 0.0625% to 0.1% for options and 0.0125% to 0.02% for futures — is more like seeking higher rent from risk-takers when the going is good, rather than making it extremely tough for them to trade.
Some would term the tinkering in taxation a timid approach. In fact, cryptocurrency investors might feel short-changed with the government’s handling of what it has termed “speculative”. Income from cryptocurrencies is subjected to “speculative income” and tax deducted at source is also imposed to make them unattractive.
Derivative investors have been under the regulatory glare in the past year. The Securities and Exchange Board of India (Sebi) has even published a report that shows 90% of investors lose money in the segment. The finance minister, Sebi chairperson, Chief Economic Advisor, head of stock exchanges, and even the Reserve Bank of India (RBI) governor have unanimously weighed in to express their discomfort with the overenthusiasm shown by retail investors in the F&O market.
It was even discussed at the recently held Financial Stability and Development Council meeting. Given the charged atmosphere, traders were obviously expecting far tougher measures.
What perhaps held back the government is its unwillingness to spoil the bull rally that has sustained itself for over three years — an extremely rare feat, despite the global turmoil and a high interest rate regime. To put the numbers in perspective, the Sensex has returned 20% each in the past two years.
If one takes data from March 2020, when it hit a low of 25,000-odd points, the Sensex has more than trebled to 80,000 points. At the same time, the number of demat accounts have surged almost five times — from 36 million to 160 million. The derivatives market’s popularity is evident from the skyrocketing turnover — the monthly turnover in the F&O segment has reached `388.6 trillion in June 2024, compared to Rs 13.1 trillion in June 2019.
It appears that the government wants to let the market regulator use its tools to rein in traders. Sebi has made some noteworthy changes in recent times. For one, it has said that the levies charged by market infrastructure intermediaries should be uniform and equal irrespective of volumes generated by any member. Similarly, it has also tweaked inclusion and deletion criteria for F&O. It has also set up an expert committee, led by former RBI executive director G Padmanabhan, to deliberate on the mechanisms to safeguard investors in the F&O market.
The committee also includes brokers’ associations, officials from stock exchanges, academics, a whole-time member of Sebi, and others. According to reports, the committee has given its recommendations to the secondary market advisory committee and a consultation paper is expected soon.
Overall, however, there seems to be a consensus that dabbling in derivatives markets is not desirable for retail investors, something that the regulator should handle instead of harsher fiscal actions. So while the Union Budget has given a direction, all eyes are now on the market regulator.