SEBI calms by buying time, promising brokers a meeting with FM, markets climb but still on the edge

Jittery stockmarkets—the Bombay Stock Exchange’s (BSE) benchmark index fell some 100 points in early trade—decided to take the market regulator on his word. The Sensex recovered soon and ended the day 102 points, or 2.10 per cent, higher at 4,945.48.

Bond markets, on the other hand, stayed somnolent as most bigwigs protested on television or attended meetings to plan their next move. Volumes at the National Stock Exchange’s debt segment nosedived to Rs 150 crore from the average daily volume of around Rs 4,500 crore.

‘‘Both the equity and fixed income markets have reacted sharply downwards primarily due to the implications of the turnover tax. We hope there will be a fair review of these proposals,’’ said S K Mitra, director, financial services, Aditya Birla group.

On Thursday, Chidambaram announced he was replacing the long-term capital gains tax with a 0.15 per cent, or a 15 basis point (bp), turnover tax on the value of all transactions involving the purchase of securities on stock exchanges.

Bond markets have planned various representations to the finance minister in the coming days. ‘‘The tax has to go,’’ said the head of fixed income at a foreign bank. ‘‘It’s not even about haggling. The whole purpose is that it should be zero.’’

Agreed an HDFC bank official: ‘‘The spreads are wafer thin in the bond market. So a 15 basis points tax will make the business a losing proposition.’’

The shorter the maturity of a bond the greater the impact on return, said Rajiv Anand, head (investments), Standard Chartered Mutual Fund. ‘‘15 bp is the equivalent of 11 days accrued at current interest rates.’’

Last month, angry traders in Pakistan smashed windows in the country’s main stock exchange to protest a new capital value tax (0.1 per cent) that they feared would increase the cost of buying shares. The Karachi Stock Exchange 100-share index had plunged by 165.12 points, or 3.1 percent, at 5219.24 on June 14. The tax has not been withdrawn.

Investors fear that the volumes may take a severe beating as most of the volumes—and hence the liquidity—is contributed by day traders and arbitrageurs, who deal on razor-thin margins, sometimes even as low of 0.10 per cent. The turnover tax in cash and derivatives trades would squeeze these margins and in some cases, the business may be a losing proposition.

The bond market resumed trading in the afternoon today, but volumes remained low. The 10-year benchmark 7.37 per cent bond was trading at Rs 110.90 down 30 paise, shortly after resumption of trade.

Traders refused to conduct any business on Friday morning till there was some clarity on the turnover tax proposed in the budget. Bond prices had fallen sharply by 80 to 100 paise on Thursday as confusion reigned over whether the turnover tax would be applicable to bonds.

The Fixed Income and Money Market Dealers Association (FIMDA) is currently in talks with the Reserve Bank of India. RBI deputy governor Rakesh Mohan is expected to meet the Finance Minister to convey the apprehensions of the dealers. Meanwhile, the finance ministry has clarified that trades done through the Negotiated Dealing System (NDS) will be exempt from trade. The tax will be levied on buying of securities on stock exchanges, instead of delivery-based trades.