India acts to curb speculation in futures and options

Sebi is also proposing to limit the total number of contracts that all the clients of a large broker can take

By H. P. Ranina

Top Stories

UAE announces 2-month grace period for residence visa violators

UAE announces fee refund for tax service charges from August 1

Paid parking in Dubai: Residents face up to Dh4,000 extra yearly costs when new rates kick in

A bird flies past the Securities and Exchange Board of India headquarters in Mumbai. — Reuters file

Published: Tue 20 Aug 2024, 6:40 PM

Last updated: Thu 22 Aug 2024, 5:25 PM

Question: With stock markets all over the world being volatile and highly unpredictive in nature, is the Indian Government taking steps to restrict and control speculative trading by small and medium investors?

ANSWER: The capital market regulator, Securities & Exchange Board of India (Sebi) has come up with a consultative paper to curb speculation in futures and options. In this paper it is proposed to increase the minimum size of index options contract from Rs500,000 to Rs1.5 million in the first phase and after six months to Rs3 million. This is aimed at curbing traders who enter the F&O market with a small amount of Rs500,000 which is permitted at present. The consultative paper also proposes that a stock exchange would be allowed to launch options contracts which expire every week on only one index.

At present, an exchange is allowed to launch weekly options on multiple indices, which expire on different trading days of the week. Sebi is also proposing to limit the total number of contracts that all the clients of a large broker can take on the day of expiry of F&O contracts. It is further proposed that brokers should collect options premium from their clients upfront. Currently, brokers allow their clients to leverage their trades using the broker’s own money on an intraday basis. As this has led to speculative losses in many cases, Sebi proposes to prohibit this practice.

Question: My daughter who is in India wants to start her own online business in fashion and lifestyle products. She believes that there is tremendous potential in this sector. Is she right in her thinking?

ANSWER: According to a recent report, the lifestyle and fashion market in India is currently estimated at $130 billion. This is expected to grow to $210 billion by 2028. Out of this figure, the online lifestyle segment is expected to touch $40-45 billion by 2028. Therefore, there are prospects that e-commerce shopping in fashion and lifestyle products will grow exponentially. The main growth is projected to come from smaller cities and rural areas which even today constitute around 60 per cent of the apparel, accessories, jewellery and footwear segments. According to the report, more than 175 million e-shoppers come from households having an annual income of less than Rs.1 million. Consumers are becoming more and more tech savvy and they are buying products across multiple categories and for different occasions.

H. P. Ranina is a practising lawyer, specialising in corporate and tax laws of India.

Question: My mother who has a property in Kolkata which she had inherited from her father wants to sell it. Her father had purchased the property in June 2003. I have been informed that under the new rule announced last month in the Budget, her tax liability may go up. Can you please explain the tax implications of this transaction in the light of the new law?

ANSWER: When the budget proposals were announced by the Finance Minister on 23rd July, it was proposed that the benefit of indexation was to be removed with immediate effect in respect of all capital assets and the long term capital gains would be liable to tax at the flat rate of 12.5 per cent instead of 20 per cent tax applicable prior to this date. However, while moving the Finance Bill in Parliament this month, the Finance Minister has tweaked this rule regarding indexation but only in a case where land or building or both held for more than two years were owned by the tax payer prior to July 23, 2024.

In respect of such assets, the benefit of indexation will continue to be available at the option of the taxpayer whereby the cost would be increased by applying the cost inflation index. Further, if the option of claiming indexation is exercised by the taxpayer, the long term capital gains so arrived at would be taxed at the old rate of 20 per cent. In short, an option is now being given to a person who held an immovable property prior to July 23, 2024 to pay tax either under the old system or the new one. Therefore, your mother who inherited the property from her father would need to compute the tax under the two options, (1) claim indexation benefit on the actual cost of the property which her father had paid in June 2003 and calculate tax at the rate of 20 per cent on the reduced capital gains, or (2) forego indexation benefit and compute tax at the rate of 12.5 per cent on the actual capital gains. Under the revised law, she is required to pay tax which is the lower of the two amounts.

HP Ranina is a practising lawyer, specialising in corporate and tax laws of India. This column is part of a weekly series titled NRI Biz Matters.