Nse Working Paper
P/2 W P/2/2011
NSE WORKING PAPER
Cost of Trading in Stock Exchanges: a Perspective
Nirmal Mohanty
November 2011
1
NSE Working Paper
Cost of Trading in Stock Exchanges: a Perspective
Prepared by Nirmal Mohanty1
November 2011
Abstract
This paper attempts to make a case for Securities Transaction Tax (STT) rationalization. The paper finds, that of the three major components of cost of trading viz. user charges (brokerage fees, exchange transaction charges and DP chargers), impact cost and statutory levies (STT, service tax on brokerage, stamp duty etc.), the user charges and the impact cost have been falling over the years due to rising competition and technology. This has led to a decline in India’s cost of trading, though it remains high relative to other emerging economies such as Brazil and Russia primarily due to high STT levels. The paper advocates that India’s STT regime should be reviewed because of negligible revenue collection by Government from the STT and also because high STT reduces trading volumes, slows prices discovery, increases businesses’ cost of capital and impairs the competitiveness of domestic financial markets, given the increased cross border mobility of capital.
Vice President, National Stock Exchange of India Ltd. The article has been published earlier in the FICCI Banking and Finance Digest, June 2011. The views expressed in the paper are those of the author and not necessarily of the National Stock Exchange of India Ltd. The author can be contacted at nmohanty@nse.co.in. 2
1
Cost of Trading in Stock Exchanges: a Perspective
I
Introduction
In India, capital markets have been playing an increasingly important role, determining the pace and pattern of economic growth and the stock exchanges are a vital institution of the capital markets. As an important intermediary in the capital market, a stock exchange provides an organized marketplace for transparent price discovery, where trading members
NSE WORKING PAPER
Cost of Trading in Stock Exchanges: a Perspective
Nirmal Mohanty
November 2011
1
NSE Working Paper
Cost of Trading in Stock Exchanges: a Perspective
Prepared by Nirmal Mohanty1
November 2011
Abstract
This paper attempts to make a case for Securities Transaction Tax (STT) rationalization. The paper finds, that of the three major components of cost of trading viz. user charges (brokerage fees, exchange transaction charges and DP chargers), impact cost and statutory levies (STT, service tax on brokerage, stamp duty etc.), the user charges and the impact cost have been falling over the years due to rising competition and technology. This has led to a decline in India’s cost of trading, though it remains high relative to other emerging economies such as Brazil and Russia primarily due to high STT levels. The paper advocates that India’s STT regime should be reviewed because of negligible revenue collection by Government from the STT and also because high STT reduces trading volumes, slows prices discovery, increases businesses’ cost of capital and impairs the competitiveness of domestic financial markets, given the increased cross border mobility of capital.
Vice President, National Stock Exchange of India Ltd. The article has been published earlier in the FICCI Banking and Finance Digest, June 2011. The views expressed in the paper are those of the author and not necessarily of the National Stock Exchange of India Ltd. The author can be contacted at nmohanty@nse.co.in. 2
1
Cost of Trading in Stock Exchanges: a Perspective
I
Introduction
In India, capital markets have been playing an increasingly important role, determining the pace and pattern of economic growth and the stock exchanges are a vital institution of the capital markets. As an important intermediary in the capital market, a stock exchange provides an organized marketplace for transparent price discovery, where trading members