Sucheta Dalal :Stamping the stock market out of Maharashtra (10 March 2003)
Sucheta Dalal

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Stamping the stock market out of Maharashtra (10 March 2003)  

Leading business newspapers report that the cash-strapped Maharashtra government plans a 500 per cent increase in stamp duty on non-delivery based trades on the stock market. Coming as it does after the seesaw on dividend and capital gains tax, one wonders whether schizophrenic policy making will always kill development efforts in India.

Consider the stamp duty issue. On April 1, the Securities and Exchange Board of India (Sebi) is to launch the Trade plus two-day settlement system (T+2) that will put Indian capital markets further on par with the world’s best trading systems. Instead, we may appropriately mark All Fools Day with a big tumble in trading volumes if Maharashtra goes ahead with its threatened increase in stamp duty (from 20 paise on Rs 10,000 to Rs one). Typically, brokers have reacted to reports about the stamp duty hike by going into a huddle to find ways of begging the State’s political leaders for mercy. There is talk on the street that the threat of a stamp duty hike is only a ploy to prod brokers into putting together a little kitty that will get politicians to see things their way. The sensible reduction in stamp duty a couple of years ago is attributed to exactly such a negotiation. There are also reports the Andhra Pradesh Chief Minister has spotted an opportunity in the turmoil and wants to lure the capital market to Hyderabad with the promise of lower stamp duties. This is patently absurd. The increase in stamp duty has caused panic among brokers because they will be worst affected but this is not a broker issue. It is, and ought to be a national issue. If the finance minister wants to restore investor confidence he has to create a credible, well-oiled capital market that does not spring frequent nasty surprises on investors. The market abhors surprises.

The stamp duty threat is just the sort of issue that should be resolved by the finance minister or the regulator; it should not be taken care of brokers rushing off to meet a few politicians with bags of goodies every couple of years. Look at it another way. Mumbai is India’s commercial and financial capital and the only Indian city that stands a chance of being considered a global commercial destination. It generates the biggest chunk of national revenue, thanks to the single-minded enterprise of the people who come here to make their fortunes. It has developed into a banking and financial centre, thanks to the two national exchanges and many major banks headquartered here. Mumbai’s entertainment industry, or Bollywood is in a similar position.

The industry has the biggest export potential after information technology, but is always subject to step-motherly treatment. Although both industries are located in Mumbai, they are national assets and cannot be used as milch cows by Maharashtra politicians to be bled for quick revenue. So far, Maharashtra politicians have shown no such realisation. On entertainment, the steep 50 per cent tax on live performances have successfully prevented India from being part of the tour programmes of any of the top global performers — they either want to perform live in Mumbai or skip India altogether. Indian newspapers and television stations may gush about Norah Jones’ Indian connection, but her recording company is hardly going to put India on her tour map unless our taxes are sensible. Where other nations of the world would have grabbed the opportunity to earn revenue, attract tourism and build their profile, Maharashtra politicians puff up their importance by having entertainment industry heads grovel before them for concessions and later harass them with raids.

The stamp duty issue falls into a similar basket. Maharashtra is home to five out of India’s 23 stock exchanges the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), the OTC Exchange of India, the Integrated Stock Exchanges of India and the Pune Stock Exchange. The first two alone account for the bulk of trading on the Indian capital market, which is around Rs 3,000 crore per day in the cash market and another Rs 2500 odd crore through the derivatives segment. In a bull market, the secondary market turnover crosses Rs 5000 crore a day and during the manic Information technology and entertainment boom of 2000-01, it even touched Rs 10,000 crore.

Maharashtra stands to gain by encouraging buoyancy in the capital market rather than killing it. From the finance minister’s perspective, he cannot afford more instability in the capital market. The primary market has been dead for several years and shows no signs of reviving. Nearly, half of Indian stock exchanges have no business at all, and the others, barring the big two are either near extinction, mismanaged or looking out for alternative businesses. Given the general slow down in the economy and declining interest rates, companies don’t want to be listed on stock exchanges or subject to tough disclosure rules. Hence, an increasing number of companies, especially multinationals are going private by buying back their shares and delisting from bourses. At the same time, brokerage charged on transactions has reduced significantly and many brokers are struggling to survive. None of this has happened because the capital market is inefficient.

In fact, the two leading bourses NSE and BSE — today operate in an efficient, automated and paperless environment which is on par with the best in the world, and arguably has more safety measures in place to detect and cushion the fallout of excessive speculation or default. Yet, day traders and speculators who operate on a no-delivery basis provide a much of the vibrancy and liquidity in the secondary market. Brokers expect an increase in stamp duty to make their trades expensive and cause trading volumes to drop significantly. Already, in the eight days after the Budget, market capitalisation has eroded by a huge Rs 25,000 crore due to war fears and general disenchantment — and there is no sign of a reversal.

Add to this the stamp duty blow and volumes could to tumble further, unless the State sees sense or the Centre intervenes. After all, whether it is Bollywood or the capital market these are nationally important industries, which a profligate State government with a blinkered vision should not be allowed to slaughter.

-- Sucheta Dalal