STT amendment impact on Futures

STT - securities transaction tax from APRIL 1st onwards will be treated like any other deductible expenditure against business income.

Before 1st of April 2008, it is allowed as rebate against tax liability since the time it was introduced by finance minister chidambaram in 2004.

Market view of this change
1. It means shelling out more tax; increases the cost, spread reduces for arbitrageurs
2. Negative for the arbitrageurs
3. Volumes will see significant reduction.
4. Mispricing of spread will be reduced
5. With this amendment , minimum 90-95% of total market likely to be directly affected
6. It only impact arbitrageurs and prop book
7. Prop book accounts for around 25% of arbitrage volumes
8. No material impact over the long term but sentimental impact in short term
9. Arbitrage return are very high earlier, but with this amendament , it will be moderate in future.

When STT is introduced first time , it was taken negatively by Market but was no impact on F&O volumes. The average daily volumes in NSE F&O were 19,000 crs in 2005 but grew to 29,500 crs in 2006 and 52,000 crs in 2007. This will take downturn in 2008 because of this amendament. Also with this amendament , experts on the view that the arbitrage mutual funds will reduce to 8% per annum(close to other income sources like bank fixed deposits) from an earlier 12-13%.

Because of this change, yesterday (1st April,2008) most arbitrageurs and jobbers went on strike, which seen deep cut in F&O volumes.