Budget offers a slew of negatives for brokerages

Volumes will suffer only temporarily, feel marketmen

Since most broking firms are also into commodities futures trading, they will now also have the additional burden of paying CTT, an analyst said. "Broking firms that have high volumes of day trading and earlier had their tax liability set off against STT will be hit even more."

With the equity markets already facing the impact of a global slowdown, the Budget proposals only dampened the mood further for broking houses.

The combined effect of higher short term capital gains tax, the introduction of a Commodities Transaction Tax, and the removal of the rebate provisions on Securities Transaction Tax was not a very positive one.

Listed broking firms’ share prices fell on Budget day by between 2 per cent and 6 per cent on Friday.

Since most of the broking firms are also into commodities futures trading, they will now also have the additional burden of paying Commodities Transaction Tax (CTT), an analyst said. Broking firms that have high volumes of day trading and earlier had their tax liability set off against STT will be hit even more, he added.

Business expenditure

“STT (Securities Transactions Tax) being accounted for as part of the business expenditure is more worrisome for the market as this will add to the tax burden,” Mr Janak Mehta, President, LKP Shares, said. Earlier, it was part of rebate provisions, which got set off against the tax liability.

“Any raise in any tax is sentimentally not very welcome, but we feel volumes will suffer only temporarily. A five per cent rise in STCG Tax is not going to be anything significant as such; if there are opportunities, people will encash them, only it is going to be slightly more taxable.”

Trading volumes

“The negative impact of increase in Short Term Capital Gains Tax will hit trading volumes in the short run but will get evened out over a period of time as markets moves from ‘momentum and speculation’ to more ‘fundamentals and value’ investing. That journey has clearly started,” said Mr Subramanyam Pisupati, President, Ventura Securities.

The major losers among broking firms on Friday were India Infoline (6.06 per cent), Motilal Oswal Financial Services (4.11 per cent), Indiabulls Financial Services (3.75 per cent), Edelweiss Capital (3.29 per cent), Geojit Financial Services (2.47 per cent).

The other losers were Religare Enterprises (2.31 per cent), JM Financial (1.11), Prime Securities (4.78 per cent), Arihant Securities (4.72 per cent), and Apollo Sindhoori Capital Investments (2.03 per cent).

Stocks of listed firm that have substantial amount of stake in broking business also fell, Reliance Capital (4.46 per cent), Kotak Mahindra Bank (2.93 per cent), ICICI Bank (1.14 per cent).

However the shares of some brokerages gained too: Emkay Shares & Stock Brokers (2.95 per cent), IL&FS Investsmart (1.12 per cent), Networth Stock Broking (0.67 per cent), JRG Securities (0.34 per cent).

MFs welcome

The mutual funds industry, however, said that the increase in short term capital gains tax will not have any negative impact on their business.

Although they themselves would have to pay more tax when there are “short term” churns in their portfolios, their portfolios really do not change so frequently, compared to that of brokerages, said an industry official.

“More important, the investor churn for mutual funds will be less,” said Mr Ajay Bagga, CEO, Lotus India Mutual Fund.

“This is what we in the mutual fund industry, as long term investors ourselves, look forward to. This will restrain our investors from short-term liquidation.”

“It will also discourage unhealthy speculation,” said Mr Arindam Ghosh, CEO, Mirae Asset Global Investment Management (India).