Worrying signs

Calcutta, March 31: Stock market players fear that share prices will tank next month because of new margin norms and the budget proposal on securities transaction tax.

On March 19, the Securities and Exchange Board of India (Sebi) had issued new norms on margin money. According to the circular, institutional investors would have to keep margin money with stock exchanges from April 21 for dealing in shares in the cash segment. At present, institutional invesors, unlike retail investors, don’t have to pay any margin money for buying and selling shares in the cash segment.

Retail investors are required to keep the full margin money in advance for buying or selling stocks. However, different scrips attract different margin money that varies between 20 per cent and 50 per cent depending on the volatility and liquidity of the scrips.

“In order to provide a level-playing field to all the investors in the cash market, as in the case of derivatives market, all institutional trades in the cash market would be subject to payment of margins as applicable to transactions of other (retail) investors. This would be implemented with effect from April 21, 2008,” the Sebi circular said.

The circular clarified that institutional investors would not have to pay the margin in advance to start with. They will, however, have to pay the money on a T+1 basis, that is the next working day following the day of trading. Subsequently, with effect from June 16, 2008, the collection of margins from institutional trades will be upfront as in the case of other transactions in the cash market.

“The margin requirement on institutional investors would certainly put pressure on the already tightened liquidity available in the stock markets,” said Bijay Murmuria, alternate president, the Association of National Exchanges Members of India (Anmi) — an association of brokers registered with the Bombay Stock Exchange and the National Stock Exchange.

According to Nirmal Kumar Agarwal, a Delhi-based broker and the outgoing president of Anmi, “The margin norm will bring in a level-playing field among all investors. As of now, institutional investors could influence stock prices to a greater extent because they could buy or sell stocks virtually without any restrictions.”

The margin requirement from April 21 may see mutual funds, which are already facing steep redemption pressure, diluting their holdings further, according to experts.

Transaction worries

The second factor that can see further depletion in the already thinning turnover on the bourses is the budget proposal on securities transaction tax (STT) on business income from trading in stocks.

Till now, under Section 88E of the Income Tax Act, traders and arbitrageurs could claim a rebate to the extent of the securities transaction tax from the tax payable by them on income arising from trading in securities.

However, finance minister P. Chidambaram in this year’s budget has withdrawn this rebate. Instead, traders and arbitrageurs will have to treat the tax paid as a business expense. “This amendment, in other words, means that the 100 per cent tax rebate so long available to stock traders and arbitrageurs will come down to 33 per cent at the maximum,” said Agarwal.