Letters: Derivatives - The other side

This refers to Praveen Chakravarty & T V Somanathan's article "Why derivatives are a Pyrrhic triumph for our equity markets" (July 21) and Susan Thomas' rebuttal "Retail trade in derivatives: Is there really a problem?" (August 18). While Chakravarty and Somanathan suggest clipping the wings of retail participants in derivatives, Thomas suggests regulating this activity through the process suggested by the Financial Sector Legislative Reforms Commission.

Market volumes have not jumped by 96 per cent overnight - but over 13 years of continuous effort by exchanges and intermediaries. The market has grown and the index has seen new levels in recent years.

While I am neither defending nor contending the views in both articles, we need to look at some more reasons for this surge in derivatives trading. It is true that the capital of domestic household savings needs to be channelled for productive economic growth, but taxation policies at the Centre have severely hampered this. Take the example of the securities transaction tax. While it is maximum in equity market deliveries (0.10 per cent on each side) and squared-off position (0.025 per cent on the sale side), it is lower on futures contracts (0.01 per cent on the sale side) and lowest on options (0.017 per cent on premium sold). In some states, stamp duty on delivery-based trades is manifold compared to other forms of trading. This lures retail participants to the derivatives market since they want to save cost and maximise gains.

Investors willing to hedge their positions have little choice in hedging since the lending and borrowing market has not matured at all and they use derivatives for this purpose. Since we don't have figures to know how much of the losses in derivatives are due to hedging, it will not be fair to conclude that participants only lose money here. Price manipulation and rumour-mongering are the handiwork of promoters and company insiders. The Securities and Exchange Board of India is making efforts to track such manipulators.

It will also be unfair to assume that individual investors trading in derivatives are "akin to regular drivers driving alongside experienced racers". Index futures and stock futures are not complex products and are used for short-term view in the market. Options, however, are risky, but we have seen some qualified traders entering the market who can give serious institutional traders a tough time.

A good taxation policy and participation by foreign institutional investors will be good for the market in the long term. As Thomas rightly summed up: "The solution lies in doing thorough homework in the regulatory process, rather than further reducing the freedom of private investors".

K K Daga Kolkata

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