New Delhi: Government needs to rationalise taxation policies to promote investments through stock markets, by giving greater benefits for investment focussed trades rather than for speculative trading, top exchange BSE's chief Ashish Chauhan said.
Currently, the taxation structure in the stock market is tilted in favour of intra-day trades and the derivatives trading, while tax rates tend to be higher for delivery-based trades and the equity market trading.
"The way Indian markets are structured, there is a kind of penalty to delivery and also to the trading in the cash market, which is basically the market for investments.
"If you do intra-day trading in stock futures, you pay 40 percent less STT (Securities Transaction Tax), vis-a-vis the intra-day trading in the equity trading. So, what is happening is that equity market liquidity has dried up and no investors want to come in and invest," Chauhan told PTI in an interview.
"Also, the maximum STT is for delivery-based transactions that are investment transactions and there is less STT for intra-day transactions which is not delivery based. The STT is even lesser for futures.
"So, effectively, we are penalising in our STT structure the investment activity. This is happening when India requires more money to be raised for PSUs and also for SMEs and large companies that would come to the market," he said.
Speaking about his expectations from the Union Budget next month, Chauhan said, "Even if you want to have a revenue neutral framework, it should be to promote investment and may be to penalise the speculations a little bit more.
"Even if we take the total traded volumes, cash market is today close to 5 or 10 percent of derivatives volumes.
"If you have a framework where you can support investment by charging less transaction tax and get the balance from derivatives trades, it would be in the fitness of change for the government that is trying to promote investments."
Chauhan said that besides structural changes in STT, the exchanges would also need to change their business model.
"Today, a large part of revenue for exchanges come from trading and therefore they also focus a lot on trading. That takes away their focus away from the capital formation.
"So, the exchanges also need to change their business models, while the government needs to make some policy changes such as providing tax benefits," he added.
When asked whether the BSE, which is present across 2,000 cities and towns, was ready for such transformational changes, he said, "The BSE has been there for 140 years and it has helped India create as a catalyst wealth of USD 1.6 trillion or over Rs 100 lakh crore.
"In some sense, it could have done much more. The BSE has to exist for the nation and it can not be thinking for itself alone. So, the BSE must work for capital formation to arrange funds for investment and to contribute to nation building, rather than just for doing trading for the sake of trading," he added.
Chauhan said that "if India has to take its rightful place at the global platform, it also needs to have a much higher market capitalisation and we need to have a large amount of participation from every nook and corner of the country".
"Today, we have 2.7 crore investors in the Indian markets. We need to think how we grow to 27 crore, say by 2030, so that more and more people participate in our markets. In the last 20 years, the Indian middle class has grown ten times, but the number of investors has remained similar. In some sense, we can say that the BSE and other participants have not been able to do enough to bring people to the markets," he added.
Chauhan said the Sensex has given a return of about 300 times in the last 35 years, but not all in the country have benefited from this rally.
"Basically, we need to educate investors. Now is the time for the BSE to stand up and be counted. When the nation is on a path to growth, the BSE also has to move hand in hand and to ensure that the capital requirement of the economy is made available to them," he added.
The BSE CEO said the equity IPO market has not been good for last few years, except for SME platforms, in terms of raising funds.
"What India needs to do is focus on moving people away from gold, silver and real estate that are not productive assets and shift the savings towards financial instruments.
"These can be be bank deposits, mutual funds or directly into stock markets, where investments can be used for providing funds to the infrastructure, manufacturing, services and defence sectors.
"These sectors basically create jobs and the government would not be able to create jobs directly. India needs to create 1.5 crore new jobs every year for the next 20 years. So, when a person invests in financial instruments, he not only gets the return but also participates in the nation building," he added.
Chauhan said that funds can be generated if the large population of India, which saves a lot, is convinced about putting their savings into financial instruments.
"Today, the way automation has progressed and the increased penetration of mobile trading, Internet etc would make things easier. So, Indian markets are poised to support the government.
"There also needs to be policies that are amenable to investments and not promote trading just for the sake of trading. Today, the stock market has somehow become focussed more on trading, rather than investment activities.
"So, they need to move away from trading-focussed business and focus on investments to help the country build the manufacturing sector by raising funds for new and existing companies. This would be mutually beneficial for the country as well as the market participants," he added.