Stamp duty cut to boost small deals in govt bonds

Smaller deals in the government bond market are set to gain from the Maharashtra government's decision to reduce stamp duty by 95 per cent in transactions related to government debt.

According to bond trading houses, the fineprint for the stamp duty reduction in the state budget announcement has removed the upper ceiling for payment of stamp duty.

At present, irrespective of the amount of the debt market transaction, the amount of stamp duty is pegged at Rs 1,000. This is now being removed.

On a transaction of a minimum lot size of Rs 5 crore, stamp duty stands reduced to Rs 250 as against Rs 1,000 earlier. This will be only valid for sovereign debt transactions such as the central and state government papers.

Stamp duty is applicable whenever such papers are traded on the exchanges and a dealer has to offer a contract note on such deals.

While contract note is mandatory for trading at exchanges, it is not clear whether bank to bank deals will also be covered by this.

Deals brokered through bond houses attract a contract note confirming the deal while it is not mandatory for inter-bank deals which comprises almost 30-40 per cent of the total volume. Moreover, inter-bank deals are mostly in dematerialised form.

Bond traders also said that even though the stamp duty has been slashed, the brokers will not be passing on the benefit in terms of pricing to the retailers or other players.

This is, a dealer with a major brokerage said, because the brokerage fees have already come down. At present, a Rs 5 crore deal fetches around Rs 1,500-1,700 as against around Rs 5,000 earlier.

The market feels that the budget has left out corporate bonds which is a significant portion of the debt market. Dealers said this anomaly should be rectified at the earliest as such incentives may popularise corporate debts which, at present, are highly illiquid.

While it has been clarified that the stamp duty will be collected by the exchanges and non-trading platforms, there is no clarity whether stamp duty relaxations are for inter-bank deals.

This is because negotiated dealing system (NDS) is the only non-trading platform which is mostly used by the banks for the trading.