False hope from SEBI transaction costs probe
Following reports from a meeting earlier this month that the
Securities and Exchange Board of India (SEBI) is aiming at reducing transaction
costs, market participants appear to have had their hopes raised falsely, with
the regulators intentions still less than completely clear.
“Market players are expecting SEBI to announce reductions in
transaction costs, as per some recent newspaper articles. But so far, SEBI has
not come up with any such intention, nor is it on their priority list,” says
Sujit Kadakia, head of Newedge India.
“SEBI haven’t concluded anything at the 6 October board
meeting, and it can’t be concluded for two reasons: firstly, the priority for
the Finance Ministry is to enact the General Anti-Avoidance Rule (GAAR) tax
announcement which was criticised very strongly, and that led to foreign
investors pulling out of India for almost three months,” says Kadakia.
After losing against Vodafone in the Indian Supreme Court,
the government introduced the GAAR – letting it tax companies retrospectively
in such cases – and is now claiming approximately US$4.5 billion in tax and
The expert committee appointed by the prime minister of
India on this issue, has recommended GAAR be deferred for three years on
administrative grounds, and that foreign institutional investors (FIIs) will
not be liable for the indirect transfer tax or any further taxes on P-notes
(participatory notes), explains Kadakia.
SEBI is also more focused on developing the Qualified
Foreign Investors (QFI) system, rather than the FII, platform, suggests
Nevertheless, with the recommendations appearing to be a
shift in the right direction, FIIs have resumed trading in India, expecting
more positive reforms from the Indian authorities, reports Kadakia.
“These recommendations have not yet been approved, but are
due to be decided on by the Finance Ministry around mid-November,” says
Rises in other transaction costs also appear to be on the
“There is also the security transaction tax (STT) which is a
direct tax and is currently levied on cash trades and future and option
transactions (F&O),” says Kadakia. “Further, the tax on F&O is
currently 1.7bps, but raising this tax and then waiving capital gains tax, is
what is being currently discussed as per the proposal from the expert committee
that made the recommendation on GAAR to the Finance Ministry.”
Kadakia points out that SEBI doesn’t have authority in
deciding on tax matters, which lies with the Finance Ministry and the tax
“What SEBI does have power over is the exchange transaction
charges, which is another level of charges on trades, levied by the National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE). These are very high, and
very unpopular with foreign investors, especially those who are market makers
or use HFT, algos and co-location trading in options,” explains Kadakia. “For
options, these are as high as 5bps, which is restricting volumes. SEBI could
consider some measures to cap these charges if the exchanges won’t consider the
feedback from market participants.”
Another proposed reform from SEBI could also actually raise
the cost burden on trading.
“The changing of settlement from T+2 to T+1 could actually
raise settlement and/or transaction costs because risk containment for clients
and custodians will become more demanding,” says Kadakia.
The impetus to reduce trading costs may finally come through
a dose of healthy competition, from upstart venue MCX-SX, which received
approval this summer to add equities trading to its currency futures
“MCX is due to go live in mid-November 2012, and they are
targeting Diwali, the festival of light, which is an auspicious day, for their
launch,” says Kadakia. “The industry is expecting that they will offer lower
exchange transaction charges and this could possibly lead to shift of volume to