Stocks
STT anomaly on exercised options pose serious risks for stock traders, brokers and Exchanges
Retail investors trading in stock options beware. The Securities Transaction Tax (STT), which is a massive multiple of their entire trade, has been hitting unaware investors on options expiry day. And, neither the market regulator not the National Stock Exchange (NSE) has put up any warning signs.
 
A few cases being discussed on social media, where retail traders have been charged STT, which is a huge multiple of their entire trading in exercised options. One Chirag Gupta had even started an online petition that has received over 7,500 signatures. While this anomaly can completely wipe out the trader or broker, many of them are not even aware till they are hit.
 
The STT in case of exercised options is charged at a rate of 0.125% of the entire contract value while it is 0.05% of the premium value if sold on the exchange. 
 
 
 
Aftab Khan, a small trader from Karnataka is running from pillar to post after he was hit by the STT anomaly. In one transactions on the National Stock Exchange (NSE)'s futures & options (F&O) segment, he could not square off his options, which expired with some value. For the transaction, he earned a profit of Rs2.08 lakh, however the STT levied on him was Rs6.26 lakh making him to pay Rs4.12 lakh to the broker.  
 
 
Similarly, Mr Gupta, who had started an online petition, also faced with a huge STT. Here is what he says...
 
"This is an incident that happened with me on the last options expiry. On 25 January 2017, the expiry for January contracts, I had bought 8600 Nifty calls at 3.25pm for Rs.0.05 as I was 100% sure that Nifty will close above 8600 based on my 25 minutes weighted average price calculations. True to my expectations, Nifty closed at 8602.75. I had bought 3000 lots (one Nifty lot was 75 units at that time) of Nifty 8600 call options at 5 paise, paying a premium of Rs11,250. By the numbers, you can see that I should have made a profit of about Rs6,07,500 (2.7x2.25 lakh) right? But what followed was beyond comprehension.
 
I did make a profit on this trade because I let the option expire with some value. But much to my surprise, at the end of the day when I received the contract note, I found out that the STT in case of exercised options was charged at 0.125% on the entire contract value as opposed to 0.05% on the premium value if I had sold them on the exchange. So even though I did make a gross profit on this trade, to my shock, I ended up with a huge loss of Rs18 lakh because I had to pay STT of over Rs24 lakh. If I had sold the options before the market closed, the STT I would have had to pay would have been a few thousand rupees, but holding it just for a few minutes extra cost me over Rs16 lakh in losses. Are Securities And Exchange Board of India (SEBI) and the Government of India aware of how traders like me can lose their hard-earned savings in this manner?"
 
The question that arise after such examples, is why there is anomaly in the way STT is levied differently and why there is a huge difference in the rates, one at 0.125% on entire value and other at 0.05% on premium? Since majority retail traders believe that the downside to an option buyer is the premium only, they need to get a warning about the STT applicable, if they are about to allow the option to expire with some value.
 
The National Stock Exchange (NSE) on its website says STT is applicable on all sell transactions for both futures and option contracts. “Value of taxable securities transaction relating to an ‘option in securities’ shall be the option premium, in case of sale of an option in securities. Value of taxable securities transaction relating to an ‘option in securities’ shall be the settlement price, in case of sale of an option in securities, where option is exercised,” NSE says.

According to BSE, during 1 October 2004 to 31 May 2008, the Budget had provided that in the case of taxable securities transaction relating to option in securities, the tax should be the aggregate of the strike price and the option premium of such options in securities. The STT was charged at 0.01% from 1 October 2004, 0.0133% from 1 June 2005 and then at 0.017% from 1 June 2006.

As per NSE, the current STT is being levied as per the Finance Act 2008. The Exchange has reportedly taken up the issue of this anomaly in STT where options is exercised with SEBI and the government and hope to get a solution soon.
 
What is more serious in these cases is if the client did not have any funds in his account, then the Exchange would debit the money from the broker's account. In Mr Gupta's case, the broker would have to pay Rs24 lakh in case there was no money in his account. "If a bunch of clients, like me, say had bought three lakh lots with around Rs10 lakh, the potential losses just because of STT would have been over Rs24 crore. What if the broker was not liquid enough to make up for this loss? This could easily be Rs24 crore or Rs240 crore or even Rs2400 crore. Would not such losses be a widespread systemic risk to everyone in the capital markets," Mr Gupta asks. 
 
According to NSE, STT payable by the clearing member is the sum total of STT payable by all trading members clearing under him and the trading member's liability is the aggregate STT liability of clients trading through him. 
 
The STT for exercised options should be either brought down to same levels that are applicable when trading on the markets, or else it can open a trading window aftermarket hours on expiry day to close out all in the money options similar to the post-market trading session for equity.
 
At present, brokers are given a 20-minutes window in equity market post closure of the market for the day so that they can scan their logs and square off positions. Similar window is required for options as well to remove the anomaly in levy of STT.
 
We sent emails to market regulator SEBI, which said that it has been forwarded to the concerned department.

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COMMENTS

Ravindra Malve

4 months ago

FnO segment is the most favorite of all.Market regulators must taker cognizance of this otherwise investors sentiments will be dampened further.

n k gupta

4 months ago

I think if Derivatives is a cash settled plateform , then why? a investor pay STT equal to Cash Transaction. I know this is true but what can we do ?

K V RAO

4 months ago

Some brokerages (read ICICI DIRECT,)have the practice of squaring off the position 10 minutes before closing if the client does not do it.In fact their system has been programmed to take care of this.

K V RAO

4 months ago

This is a serious anomaly that may not stand the test of law and natural justice.This is also a best case for public interest litigation.I am quite sure the judiciary will frown on this rule of SEBI.Better they set it right.

REPLY

Kunal Singh

In Reply to K V RAO 4 months ago

such strong judgement, why not test it?

MUKUND PHADKE

4 months ago

Exchanges and sebi must look into interest of common investors.

Nifty, Sensex Make a New All-time High – Thursday closing report
We had mentioned in Thursday’s closing report that Nifty, Sensex were in an uptrend again. The major indices of the Indian stock markets rallied on Thursday and closed with gains over Wednesday’s close. The trends of the major indices are given in the table below:
 
 
The key domestic equity indices -- S&P BSE Sensex and NSE Nifty -- on Thursday scaled record highs on the back of positive global cues and hopes of an easing of the monetary policy. Global equities traded higher after US Federal Reserve Chair Janet Yellen, hinted at more gradual tapering programme at her testimony before the US Congress, pointed out market analysts. India's retail inflation hit a record low of 1.54% in June, lowest since 1999, raising hopes of an interest rate cut by RBI (Reserve Bank of India) ahead of monetary policy next month (in August).
 
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With the retail inflation easing to a record low of 1.54 per cent in June, the government's Chief Economic Adviser Arvind Subramanian on Wednesday said it reflects a paradigm shift in the process to low levels of inflation, which has been missed in the large systematic inflation forecasts made. "This low, heartening number is consistent with our analysis for some time now -- and which will be fully elaborated in the forthcoming Economic Survey -- of a paradigm shift in the inflationary process to low levels of inflation, a shift that I think has been missed by all reflected in the large, one-sided, and systematic inflation forecast errors that have been made," Subramanian told reporters here. As per the Central Statistics Office (CSO) data on Consumer Price Index (CPI), retail inflation was dragged lower to 1.54 per cent in June due to a sharp fall in the prices of food items like pulses, vegetables, and other perishables. The current inflation rate is the lowest since the series began in 2012. With low inflation, interest rates are likely to soften, giving a boost to business and stock markets in India.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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Sebi calls for stakeholders' views on derivatives market
Stock markets regulator Sebi on Wednesday called for stakeholders' views on various issues related to derivatives trading, so as to further strengthen the framework in line with global best practices.
 
The regulator floated a discussion paper to evaluate whether there is a need to further strengthen the regulatory framework for derivatives in India. 
 
As per the paper, derivatives market in India has grown rapidly in recent years and its orderly growth, development and alignment of both cash and derivatives markets is important.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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