Kotak MF's Nilesh Shah bats for restrictions on retail investors in F&O

Budget with BS: The Fine Print: 'Atithi Devo Bhava' is good for tourism not for financial markets; there should be no differential treatment, said Nilesh Shah, managing director of Kotak Mutual Fund

There should be restrictions on retail investors just like institutional investors as individuals trading in F&O are not retail investors but retail speculators, said Nilesh Shah, managing director of Kotak Mutual Fund, on Wednesday (July 31).

Shah was responding to a question on the increase in Securities Transaction Tax (STT) on all futures and options (F&O) contracts traded on recognised stock exchanges during a panel discussion hosted by Business Standard. This session, ‘Catching The Market Pulse’ was part of ‘Budget with BS: The Fine Print’ – a one-day post-Budget event held in Mumbai. The event was dedicated to decoding the intricacies of the key financial exercise.

 

Addressing the gathering at the session, titled ‘Catching the Market Pulse’, Shah said he believes we have only covered half a distance. “Today, if a foreign investor trades in the domestic market, they are taxed as capital gains. However, Indians trading in the derivative markets are taxed as business income. This anomaly has to be removed. ‘Atithi Devo Bhava’ is good for tourism, not for financial markets,” he said.

He added, “In addition, we need to create a level playing field. On one side of the fence, there are people with high computing power making money; and on the other side, there are speculators. So, you need to tax the high-frequency traders. Hence, the STT increase is a step in the right direction.”

Shah, however, added, “Individuals who are trading in F&O are not retail investors but retail speculators. They don’t know anything about investment. Therefore, there is a need to raise financial awareness to leverage F&O’s potential. Like institutional investors, there should be some restrictions on the retail investors also.”

For the uninitiated, the Union Budget 2024-25 increased the rates of STT on the sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium and on the sale of futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded.

Sharing his views on the STT rise in F&O trading, Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies said, “Increase in short-term capital gains tax would not prevent people from trading in F&Os. Sometimes, it is just gambling. Sebi is working to bring down the speculative activities in the F&O market segment. I believe Sebi norms will have a bigger impact on F&O trading rather than a tax increase.”

Adding to Holland, Prashant Jain, founder and chief investment officer, 3P Investment Managers said, “The losses in F&O are quite large. It is effectively the top line of brokers, the revenue of stock exchanges, the government revenue, and that of the regulator. In F&O, you make money, when someone loses money. So, in that sense, it’s not a zero but a negative sum game. So, it was the right decision. We should wait for the Sebi consultation paper to come out.”

Meanwhile, speaking on F&O trading, Raamdeo Agrawal, chairman of Motilal Oswal Group, said, “We compare ourselves with the US. Our competition is with China, Vietnam, and Singapore. Such countries don’t have capital gain tax. If we want foreign flows, then we should also let go of capital gain tax. To attract domestic and foreign household savings into the market, we should avoid such taxes.”

He added, “There are no guts in bureaucracy. If you take a little risk on your revenue even for six months, the buoyancy in the markets will come back.” The session was moderated by AK Bhattacharya, editorial director of Business Standard. 

(Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt )