Tax Dues Mar Brokers Foray Into Derivatives

The Securities and Exchange Board of India (Sebi) has decided that the brokers seeking fresh registration for the derivatives segment, will have to first clear their turnover tax dues to the market regulator.

Brokers are upset with the decision, and feel that this would deter the growth of the derivatives market as the tax would mean an additional burden on them, and substantially reduce the interest in the segment, which needs to grow fast.

According to rough estimates, the aggregate dues of the broking firms to Sebi as outstanding tax on turnover is about Rs 800 crore. The amount due from individual brokers varies from few lakh to several crores.

The brokers had moved court disputing the Sebi's claim, but they lost their case in the Supreme Court in February this year, after a protracted legal battle.

In addition to the dues to be cleared, brokers would have to pay the standard registration fee - which even for a trading member is about Rs 20 lakh - and for the software.

Sebi has also mandated that all broking firms seeking registration for the derivative segment must have at least two experts in derivatives trading with a NCFM (NSE Certification for Financial Markets) certificate.

Sebi full time board member Jayanth R Varma said: "It is untenable that the brokers will be offered registration for a new segment without clearing their dues. Besides, when the apex court has upheld Sebi's claims, the brokers cannot get away without paying it."

Speaking on the various nuances of the derivatives segment, Varma said, in the beginning the derivatives segment would be 'cash-settled', implying that the difference between the strike price and reigning market price would be paid to the gainer, and securities would not be delivered.

"We will follow the American model in individual stock options, and the European model in index options," Varma said. In the American model, one can exercise the option at any point during the entire life of the option, while in the European model, the right to exercise the option is restricted within a specific time frame.

Varma also said, it would take the market regulator a couple of meetings to fine-tune the risk management system for the segment. Varma added, in the next board meetings, Sebi would discuss whether smaller exchanges like Calcutta Stock Exchange would be allowed to start their own derivatives segment.