Assocham study cites higher transaction cost, $ -based trading as reasons
Indian bourses can see further depth and volumes if policymakers were to remove or even cut securities transaction tax (STT), which is a levy on all trades put through stock exchanges, industry body Assocham has said.
This could help stem the continued export of India’s financial markets to international markets, added Jagannadham Thunuguntla, head of Assocham’s Capital Markets Committee, here on Tuesday.
Assocham has come out with a study on factors causing shift in India’s stock market share to offshore exchanges.
Foreign investor interest in American Depository Receipts of Indian companies and also investments in SGX Nifty have been on the rise in recent years, Thunuguntla said.
The probable causes for foreign investors to prefer taking exposure to Indian equities through foreign exchanges instead of directly entering Indian markets are several, the study has found.
These could be mainly exchange-related issues, including trading hours, transaction costs and products offered by foreign bourses being US dollar-denominated.
For instance, the levy of STT of 0.125 per cent on the value of all share market transactions in India has led investors to prefer taking their positions to Singapore.
In Singapore, no STT is levied. SGX’s Nifty Future Open Interest began rising after the introduction of STT in 2005.
There is no interest payable on margins in India. Other benefits of SGX Nifty include availability of cross product margin offset.
Lower transaction costs due to lower taxations have helped Singapore emerge as the destination of choice for trading in Nifty options. Also, taxes on profits are minimal in Singapore.
While foreign investors participation in NSE Nifty turnover declined to Rs 3.66 lakh crore in FY13-Q2 from Rs 4.17 lakh crore in FY10-Q2, it had substantially rose to Rs 2.84 lakh crore in SGX Nifty in FY13-Q2 from Rs 1.60 lakh crore in FY10-Q2.
IN DOLLAR terms
As the contracts are quoted in dollars, foreign institutional investors face only price risk and no currency risks. FIIs save on currency hedging costs by trading in Singapore where the contracts are dollar-denominated. Due to reduced risk element, SGX Nifty is preferred.
In India, high transaction cost has reduced market depth and liquidity, increased volatility and made Indian markets less competitive.
Transaction costs include various components such as brokerage, SEBI’s turnover fees, custody charges, clearing charges and levies such as stamp duty. India is the only country to levy stamp duty.
There are varying stamp duties in different States and, therefore, volumes are getting skewed toward certain States.