Sharp hike in STT pulls Nifty and Sensex down by 2%; brokerages feel the heat

Synopsis

India's recent hike in Securities Transaction Tax (STT) on futures and options has triggered a significant market downturn, mirroring a similar event in 2004. The move, aimed at curbing speculation, has increased trading costs for all participants, impacting brokers and foreign investors particularly hard.

Sunday circled back to a period when most of today’s active traders weren’t even born—July 2004. After a surprise summer poll victory, the then finance minister P Chidambaram introduced the Securities Transaction Tax (STT) for the first time in the cash market. That caused Indian equities to crater. Sunday was no different. With India now the global derivatives leader, higher STT on futures and options caused the Nifty and the Sensex to lose 2% each.

Agencies

CURBING SPECULATION
Sunday’s proposal, finance minister Nirmala Sitharaman said, seeks to curb F&O speculation. “Higher taxation across both the F&O segments will affect market participants across the board including retail traders, institutions, high-frequency traders, proprietary desks, algorithmic traders, brokers and exchanges,” said Rajesh Palviya, head of technical and derivatives research, Axis Securities.

The Centre raised the STT—a levy collected at the time of the trade—on futures to 0.05% from 0.02% and on options premium, and the exercise of options, to 0.15% from 0.10% and 0.125%, respectively. Brokers said futures outgo would rise 150%. For instance, STT on one lot of Nifty Futures at 25,000 levels will increase to Rs 812 from Rs 325 come April 1. On options, the tax on premiums will climb 50%. On exercising options, it will be 20% higher. “In the near term, the sharp increase in STT is a headwind, as it materially raises hedging and trading costs,” said Ankur Jhaveri, MD & CEO, institutional equities, JM Financial Institutional Securities. “This is likely to impact market liquidity and increase impact costs.”

BROKERS BATTERED

Brokers were top losers on Sunday, with the Nifty’s Capital Markets index tumbling 5.8%. Angel One fell 8.6%. BSE, Nuvama Wealth, CDSL, and Billionbrains Garage Ventures (Groww) dropped between 5% and 8%. “Brokers have already been seeing a drop in active clients, with derivatives volumes trending lower over the past year, and we expect this trend to continue after the announcement,” said Ajit Mishra, senior vice president–research, Religare Broking. “However, retail participation is unlikely to be significantly impacted, as most retail traders operate with small lot sizes and are typically options buyers, and will see a lower cost impact.”

Palviya said brokers are struggling to retain clients due to the pressure on returns in the past 15- 16 months. “The rise in derivatives trading costs is set to further strain their profitability,” he said. The move is a setback for foreign funds struggling with underperformance in Indian stocks. “The cost of trade for FPIs will definitely go up, and may impact their trading activities, as they use derivatives for hedging their cash market positions,” said Prayesh Jain, capital market analyst, institutional equities, Motilal Oswal Financial Services.

“We may see the effect from the next quarter onward as the new taxes will be implemented from April 1.” Foreign Portfolio Investors (FPIs) net sold shares worth `31,901 crore in January. “Higher transaction costs remain a concern for the investor community, and FIIs may view India less favourably when comparing trading costs across global markets,” said Jhaveri.

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