Presentation on theme: "And then there’s the proposal for a Financial Transactions Tax... Even to be considering this at a time when we are struggling to get our economies growing."— Presentation transcript:
And then there’s the proposal for a Financial Transactions Tax... Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness -- David Cameroon, British Prime Minister June 2014
Average Daily Volumes across the Globe in May 2014: CountryGold (Rs. Crore) Copper (Rs. Crore) MCX, India3,9751,075 Shanghai, China37,415116,500 CME, USA / LME, UK128,740148,200 China is 9 times India and U.S. is 32 times India We aspire to be among the world’s leading industrialized nations but the volumes of Copper, the flagship industrial metal, in China is 108 times India & in London 137 times India
How much Gold can you buy at best available Sell Price & Vice Versa without a change in Price? At a Single Price, you can buy just Rs. 0.5Cr worth in India while you can buy Rs. 99 Cr in China & Rs. 28 Cr in U.S. CountryYou Can SellYou Can Buy KgsRs. CroreKgsRs. Crore China1554039199 U.S.1062511528 India4120.5 CME U.S. SHFE China MCX India
CompanyCommodityHedge Activity abroad HindalcoAluminium 353350 MT actual hedged yr end (Rs. 4452 cr approx) HindalcoCopper 72400 MT actual hedged yr end (Rs 3342 cr approx) SterliteCopper90725 MT Buy & 90425 MT sell actual (Rs 8300 cr ) SterliteGold62478 ounces buy & 143779 sell actual (Rs 1580 cr) SterliteSilver603152 ounces buy & 2295815 sell actual (Rs 343 cr) BPCLCrude OilRs 79612 cr import; hedge not disclosed HPCLCrude OilRs 55934 cr import; hedge not disclosed IOCCrude OilRs 184558 cr import; hedge not disclosed Cost of Hedging 1 Cr.Gold Future Metal Future Gold Future Any Comm. Future HeadCMELMEChinaIndia Exchange Fees150350400210 GST/ S. Tax00026 Stamp Duty000200 CTT0001000 Cost per Cr.1503504001436 Cost of Hedging is significantly high in India as compared to globally Large Corporate have massive hedging requirements. Most Large Corporates are hedging more than 90% of their needs in International Markets If large Companies can find hedging attractive in India, it will save millions of $ in foreign Exchange, increase employment in Indian financial sector, make our market vibrant and increase Government service tax collections. Vicious circle: CTT is reducing liquidity & increasing hedging costs and hence these companies are finding India too expensive & shallow to hedge. Non participation by these companies is further reducing the liquidity.
If we can abolish CTT & make our exchanges attractive to these companies: A huge amount of margin money in Foreign exchange can continue to be in India and benefit the system Liquidity in our markets will deepen and allow other industries like extrusions, plastics and so many others to hedge their risks Huge saving of Millions of Dollars paid out by these companies in foreign exchange towards brokerage, commission, exchange charges Increase in employment in Financial sector in India Increase in service tax and other revenues to Govt.
RankExchangeNotional Value(bn USD) 1USA36000 2CFFEX12034 3EUREX( euro stoxx 50)9692 4EUREX(DAX futures)8223 5Korea Exchange7087 6NYSE LIFFE(FTSE 100)2481 7JPX (OSAKA) NIKKEI FUTURES2228 8NYSE LIFFE(CAC 40)1637 9JPX( OSAKA)1488 10TAIFEX1246 11MOSCOW EXCHANGE(RTS INDEX FUTURES)947 12NYSE LIFFE(FUTURE AEX INDEX)866 13BM&FBOVESPA(BOVESPA INDEX FUTURE)681 14EUREX( SMI FUTURES)603 15NYSE LIFFE(FTSE 100)495 16NSE INDIA(CNX S&P NIFTY)399 India Benchmark Index ( Nifty Futures) investments lowest in the World. Investors who want exposure in any country can buy a Benchmark Index Future. It will give them exposure to the Index without the expense of purchasing all the underlying assets on the Benchmark Index. India might be in one of the top derivatives exchanges but only in number of contracts. In notional value, we are one of the lowest in G20 and lowest in BRIC Countries USA leads the table with 36000 bn USD, about 90 times that of India. China is 30 times Source: WFE/IOMA Derivatives Market Survey 2012
Ratio is used by World Bank for comparing countries with varied GDPs and Market Caps Data for 9 years starting 2003, a year before STT Brazil, Russia, China have grown 92% to 101% over 9 years while India has shown 61% degrowth In developed countries, France which introduced FTT is showing degrowth as compared to a stable U.S. and Japan At 2012 end, India’s turnover ratio was 55 compared to average of 94 for the sample with China’s ratio being 164 Country20032012% Growth H. K.48123156 Brazil3468101 China8316497 Russia468892 S. Africa455521 Japan8810013 U.S.A.1231252 France9566-30 India13955-61 Source: The World Bank, http:// data.worldbank.org/indicator/CM.MKT.TRNR Low Turnover Ratio is affecting liquidity and investment flows in Indian industry To measure the health of a market, most economists recommend: Turnover Ratio= Total Trading value of all shares in that year for a yearAverage of (Opening Market Cap and Closing Market Cap)
Year Value (in Crore) %age Growth 200493432 2005623575 20062025665 2007272982134.76 2008428465356.96 2009595665639.02 2010869687046.00 20111493285271.70 201214890596-0.28 Jan to Jun 137356793-1.19 Jul to Dec 133376412-54.10 Jan to 6th Jun 142344004-68.14 The volumes have crashed by 60% post CTT regime * Volumes above are those on MCX Gold Copper Crude Oil 10.30 am16%28%33% 12.30 pm123% --1% 2.30 pm-49%16%62% 4.30 pm65%-25%109% 6.30 pm37%208%-59% 8.30 pm80%120%159% 10.30 pm34%87%147% Average Increase in Impact Cost 34%55%49% % change in Impact cost from pre CTT to post CTT Source: Working paper on Impact of Transaction Taxes on Commodity Derivatives Trading in India by ICRIER
STT makes our trading cost 5 times the cost of trading in Singapore Source: Bloomberg Volumes of SGX and NSE are normalized to equivalent quantity, Currency factor has been taken at 50 HeadSingaporeIndia Exchange Fees 231190 GST/ S. Tax1623 Stamp Duty0200 STT01000 SEBI TOT020 Cost per Cr.2471433 Result: Singapore NIFTY Volumes as a %of total NIFTY has breached 30%, directly affecting growth of our financial markets and employment Because Derivatives are a form of insurance or risk management, the cost of trading in them has to be low or investors will not find it economically sound to purchase such "insurance" for their positions
If this trade is retained in India: The margin Money of Rs. 2543 Cr will be in India and benefit the system These volumes will be great add to the market depth and reduce impact cost It will enhance employment in financial sector Increased Service Tax Collection on brokerage coming to Indian Firms instead of foreign counterparts It is shocking that open interest on NIFTY Futures worth Rs. 32352 Cr sits on foreign soil & is higher than that on NSE with Singapore having 60% market share
Explicit Cost of Delivery Trades in Cash Market To buy securities worth Rs 1 Cr, buyer incurs Rs 23000 which is very high STT first directly increases cost itself and then increases cost indirectly as the impact cost increases dramatically. Nature of CostPayeeCost / Cr. (Rs) Weight (%) BrokerageBroker500029 TOTExchange3252 Service TaxGovt.6584 Stamp DutyGovt.10006 STTGovt.1000059 SEBI TOTSEBI200 Total Cost17003100 Add: Impact Cost6000 Total Cost23003 Out of total explicit cost 68 % goes to the government. How can any Industry survive after paying 68% to the government? STT Constitutes 58 % of total explicit cost Broker only get 29 % of the explicit Cost
Live Mint: 22 nd January 2014 15,000 sub-brokers have gone out of business since April 2013: SEBI. ▪ 30,000 sub-brokers have closed down since April 2011 ▪ Reason mainly due to dwindling interest from retail investors and tighter regulations ▪ Brokers also out of business, number fell by 600, highest in 3 fiscal years Financial Express: 09 th July 2013 Stock Market: 14,000 sub-brokers shut shop ▪ Worst time for a sub-broker ▪ Cash Market volumes plummeting to record four year low ▪ Declining Retail Interest ▪ Surviving business has increasingly difficult
Mutual Funds saw net outflow in Equity Schemes & cannot fund long term equity needs of midsize companies Source: SEBI Handbook Retail Active Investor Participation directly into markets is also down hugely. FII Participation is most desired but not their domination in absence of a counter force MF Equity Mobilization (in Crore Rs.) Retail Participation in Stock Market (%age of Total)
Active retail investors disallowed 88E tax rebate, face double taxation & have stopped providing liquidity Rules do not allow Institutions to invest in Low Turnover and High Impact Cost Companies GROWTH Investor putting idle money into non productive Gold
Against 42595 Cr raised in 2007–08. Average of next 4 years only, Rs. 25963 Crore Source: SEBI Handbook New SME Market not even properly born NSE SME Market inaugurated in Sep 2012, in 2years: Only 5 Cos Listed Raised only 86 Crores Total Turnover only 40 Crores Company Issue Size Rs Cr Turnover Thejo Engineering191 Veto Switchgears2535 Opal Luxury Time131 MITCON Consultancy251 Sanco Industries43 Total8640 IPO Mobilization (in Rs. Crore)
Average number of Shares per day No. of Cos < 10000337 > 10000 & < 20000139 > 20000 & <50000201 > 50000 & <100000145 > 100000 & < 200000146 > 200000523 Total No. of Cos1491 More than 65% of Companies trade less than 2 Lakh shares a day 476 cos ( 31% ) trade less than 20,000 !! As a result, Strong Fundamentals of companies Ignored due to low liquidity as Investors avoid stocks with no exit, i.e. low liquidity, high impact cost caused by STT Data is for 15 th May 2014 to 14 th June 2014 when the Index and Market Cap was the highest Top 6% of the total listed companies dominate 82% of the turnover
Jeera Production Castorseed Oil Export CASTOR SEED MEALS EXPORT 2006-07185000202175 2007-08175000339475 2008-09152000305000203915 2009-10176000340000240466 2010-11190000343254209036 2011-12218000404489341308 2012-13275000430752383392 2013-14375000 Earlier exporters could not take firm export orders as they were not confident of getting confirmed supplies at a fixed price. Now, exporters are buying far month futures and are able to quote firm prices and deliver schedules to overseas buyers. All this has ensured that Castor Seed exports from India have greatly grown in last 5 years along with the exchange ecosystem. Earlier farmers, just after harvest, were selling their crop to the processors at distress prices who were making super normal profits Cynics say that farmers do not trade in India. But prices disseminated by NCDEX, FMC and MCX help the farmers know the correct price and ensure that processors pay them the right price Also, efforts by NCDEX and MCX have ensured that an ecosystem of huge no. of modern warehouses along with laboratories and assayers. This safe system has encouraged modern financial players to deploy funds in cash and carry arbitrage with a return expectation of 15%. This far lower than the traditional moneylenders who used to rip off farmers, growers. Financiers are storing in warehouses and are selling in the market in a staggered manner according to demand instead of all at harvest time
Post u/s 88e removal from 2009 onwards Turnover has fallen continuously across all segments though Market Capitalization has increased. Figures in Crores F.Y.CMCM-NON ND No of Scripts Traded Market Capitalisation Index and Stock FUTUREIndex and Stock Options TOSTTTOSTTTOSTTTOSTT 2004-05 11,91,364 316 7,38,646 56 870 15,85,585 22,56,203 127 2,90,779 17 2005-06 18,89,667 1,738 11,71,594 127 956 28,13,201 43,05,452 573 5,18,722 69 2006-07 22,44,170 2,814 13,91,385 362 1,191 33,67,350 63,70,541 1,185 9,85,701 168 2007-08 40,29,072 5,178 24,98,025 626 1,264 48,58,122 113,69,230 1,974 17,21,247 293 2008-09 29,82,904 3,610 18,49,400 502 1,327 28,96,194 70,49,753 1,201 39,60,729 131 2009-10 44,49,216 4,871 27,58,514 758 1,968 60,09,173 91,29,635 1,552 85,34,029 121 2010-11 38,77,777 4,653 24,04,222 601 1,607 67,02,616 98,52,510 1,675 193,95,709 136 2011-12 29,89,141 3,587 18,53,267 463 1,807 60,96,518 76,52,668 1,301 236,97,062 166 2012-13 28,73,436 2,758 17,81,530 445 1,683 62,39,035 67,51,003 1,148 247,82,001 173 2013-14 29,88,601 2,869 18,52,933 463 1,768 65,17,421 80,34,577 803 301,91,011 211 Data Source Nse 2011-12 to 2013-14 are Approx figures
When STT was bought in, official reason was in lieu of it, Capital Gain Tax benefit is being given. But no such benefit was given in lieu of CTT and hence there is no rationale for the birth of CTT. People are paying indirect taxes: excise on Manufacturing, service tax on Services, and VAT on sale. And Direct Income Tax on Profits. Then, what is the nomenclature of CTT ? Thus, CTT is an entry level regressive tax and an albatross around the neck of market liquidity. It is a mindless collection of revenue lacking any basis.
STT was brought in with NIL Long Term Capital Gains Tax. However, people in Trade and Commerce, who are assessed under “Business Income”, in any case, pay full 30% Tax and Surcharge both for Equities and Commodities. They are not eligible for any benefits on Capital Gains So paying CTT & STT and direct Income Tax at 30% leads to effective taxation rates upwards of 80% Section 88E withdrawal from April 2008 led to huge fall in Market Volumes and Government collection of STT Till 31 st March 2008, STT was treated as tax rebate under section 88E and the market was somehow able to cushion the impact of STT slightly. However, the withdrawal of 88E and consequent double taxation completely broke the back of the market and huge fall in volume. STT Collection on delivery dropped from 5178 Cr in 2007-08 to 2869 Cr in 2013-14 Worldwide in any Business there are 2 types Taxes:- Manufacturing(Vat, Excise,etc) or Service Tax. Derivative trading doesn’t come under Manufacturing and our Sector pays service Tax. STT is nor a manufacturing tax or service tax so it should be removed.
Studies Sample Type of reform Measure of Liquidity Result for liquidity Hu (1998) H.-K.,Japan, Korea,1977-93 STTTurnoverInconclusive Baltagi et al. (2006)China 1997STTVolumeNegative Chou & Wang (2006) Taiwan 1999-2001STTVolume,bid-askNegative Liu (2007)Japan 1989STTAutocorrelationNegative Foucault et al.(2011) France 1998 to 2002 Cost of forward Auto covariance, Amihud Negative Pomeranets & Weaver 2012 U.S. 1932 to 81STTHolden spreadNegative
CountryFuturesOptions Australiana Brazilna Canadana Chinana FrancenaNa Germanyna Japanna India 0.017% of delivery Price 0.017% on premium, 0.125% on strike Among major nations across the world, there is no FTT/ STT except India and Taiwan CountryFuturesOptions Russiana South Africana South Koreana Hong Kongna Singaporena Switzerlandna Taiwan6bps on Index 10-60 bps on premiums
People say Govt. will never abolish STT & CTT as it yields Rs 4000 Cr. At National level, Rs 4000 Cr is not big. It is less than what TCS earns in 1 qtr It is too small a price to pay for the prosperity of nation Welfare of India should be Government’s prime objective Its decisions should not be influenced by revenue considerations alone It needs to be a balance between market growth and revenue collection Collect Revenue of Rs 4000 Cr. Continue with STT/CTT Boost Growth 1.Increase market liquidity 2.Bring back exported markets 3.Kick start fundraising by Industry 4.Increase Employment
The Government should abolish CTT & STT and treat this Rs. 4000Cr as a historic national investment to take our markets to a much higher level. Like any good investment, this investment will yield huge returns over time. The removal of these regressive taxes will hugely reduce the impact cost in markets and greatly increase the liquidity. There will be huge gains resulting from deepening of National Markets & benefits to entire ecosystem due to linkages with the economy e.g. Fund raising by industry ; Channelizing of household savings in productive assets Disinvestment by Govt. Employment Generation Taxes on profits of individuals and corporations due to buoyant economic conditions Huge Increase in Service Tax because of Increase in Brokerage & Turnover.
InstrumentCurrent RatesRequestRationale Revenue Loss (Cr.) Equity Futures Rs 1000/Cr. on sellAbolish or Rs50/Cr. for audit trailNo tax on hedge instruments anywhere in the world;800 Equity Options Rs 1700/Cr. on sale on premium Abolish or Rs50/Cr. for audit trailNo tax on hedge instruments anywhere in the world; 200 Equity Options Exercise Rs 12500/Cr. on underlying value to buyer of option Abolish or Rs5000/Cr. on underlying value to buyer of option To Save tax partly, people square up open interest Equity Cash Delivery Rs 10000/Cr. on buy and sell Abolish; or Rs 5000/Cr. only on sell Tremendous boost needed for shallow cash market2100 Equity Cash Non Delivery Rs 2500/Cr. only on sell Abolish or Rs50/Cr. for audit trail Enable liquidity provider to reduce impact cost by providing tight bid ask 460 Commodity Futures Rs 1000/Cr. on sellAbolish or Rs50/Cr. for audit trail No tax on hedge instruments anywhere in the world; Huge scope to build commodity eco system 600 For Indian taxpayers assessed under Business Income, paying 30% slab rates & not claiming Capital Gains, section 88 E tax rebate should be restored