Finance Minister Nirmala Sitharaman targets rising retail participation in Futures and Options trading with new STT hike
According to a report by PTI, Finance Minister Nirmala Sitharaman has proposed an increase in the securities transaction tax (STT) on futures and options (F&O) trading, aiming to discourage retail investors from participating in these high-risk instruments. In her Union Budget speech on Tuesday, she announced that the STT on the sale of options in securities will rise from 0.0625 per cent to 0.1 per cent of the option premium, while the STT on the sale of futures in securities will increase from 0.0125 per cent to 0.02 per cent of the trading price.
This decision follows concerns raised by the Economic Survey over the surge in retail investors’ interest in derivative trading, describing speculative trade as unsuitable for a developing country. The survey highlighted that the dramatic rise in retail participation in F&O trading is likely driven by gambling instincts and the lure of outsized gains.
“Derivatives trading holds the potential for significant profits, appealing to human gambling instincts and potentially increasing income if profitable. These factors are likely driving active retail participation in derivatives trading,” the Economic Survey 2023-24 noted, as reported by PTI.
Recently, SEBI chief Madhabi Puri Buch also warned investors about the dangers of heavy betting on F&O. This warning follows earlier cautions from Sitharaman and Chief Economic Adviser V. Anantha Nageswaran about the growing risks of F&O trading for retail investors.
The popularity of F&O trading is evident from its explosive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 lakh crore in March 2024, up from Rs 217 lakh crore in March 2019, according to PTI. By comparison, the average daily turnover in the equity cash segment was Rs 1 lakh crore, whereas the F&O segment saw an average daily turnover of about Rs 330 lakh crore.
Futures and Options trading involves contracts that derive their value from underlying assets like stocks or commodities. While futures contracts obligate transactions at predetermined future dates and prices, options provide the right, but not the obligation, to buy or sell assets at set prices within specific periods. Despite their use for hedging risks, speculating on price movements, and arbitraging price differences, these financial instruments carry significant risks, including leverage risk and market volatility, which can lead to substantial losses.
F&O trading has become a speculative tool for quick profits in the stock market, but many retail investors are losing money. A SEBI study revealed that 89 per cent of individual traders in the equity F&O segment incurred losses, averaging Rs 1.1 lakh in FY22. During the pandemic, participation in the F&O segment surged, with the number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21. (PTI)
