While India’s financial sector shows promising growth, the Economic Survey 2023-24, released on Monday, cautioned that certain areas need focused attention. Amidst the ongoing regulatory oversight, the survey highlighted that the significant increase in retail investors in the stock market calls for careful consideration.
“This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern,” the survey said.
As per a Securities and Exchange Board of India (Sebi) study, more than 90% of retail traders venturing into the futures and options (F&O) markets are making losses, which is worrisome, said market expert Ajay Bagga.
He noted that retail participation in the stock markets through well-regulated, well-managed and diversified mutual funds is a positive development. By December 2023, Indian households owned more of the Indian markets than foreign portfolio investors (FPIs), a significant achievement. With increasing household savings going into investments and speculation, regulators need to determine when to intervene and what measures to take, he added.
So, what is likely driving active retail participation is derivatives trading. “Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable,” the survey said.
The capital markets have seen a surge in retail activity through direct trading and indirect trading via mutual funds over the last few years. In FY24, individual investors accounted for almost 36% of the equity cash segment turnover. The number of demat accounts with both depositories increased from 114.5 million in FY23 to 151.4 million in FY24.
Globally, derivatives trading often results in losses for investors. Therefore, raising awareness and providing continuous financial education are crucial to inform investors about the risks and potential for low or negative returns from derivatives trading. The survey said, “A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives.”
Bagga said classifying F&O income as speculative or taxing it at a uniform rate of over 30% instead of the current rate would hurt investor sentiment. Moreover, increasing the tenure for capital gains on stocks or a move to a marginal tax rate for any holding period, like debt funds, could further hit sentiment, he explained.
While there is talk about an increase in lot sizes, limiting expiry days and increased margin requirements to create a retail-restrictive environment in the derivatives segment, there may be more to this, warned Nirav Karkera, head of research at Fisdom.
“It wouldn’t be much of a surprise if this subject features in the Budget speech and even attracts some retail-restrictive policy,” he remarked. Considering how the idea is not to do away with the segment but simply protect retail investor interest, the likelihood of straightforward penalization through elevated taxation seems to be pretty much off the table, he explained.
Kranthi Bathini, director of equity strategy at WealthMills Securities, noted that the Sebi panel’s pending decision on various topics, including whether to increase the minimum lot size, is a key factor to watch.
Deepak Jasani, head of retail research at HDFC Securities, suggests that the capital markets regulator might introduce curbs on F&O trades gradually. Instead of implementing all seven-odd curbs that were discussed at the panel meeting at once, they could probably introduce two at a time, monitor market reactions, and, if the markets react very negatively, potentially roll back one or two.
What finance minister Nirmala Sitharaman might consider is raising the securities transaction tax on specific trades, such as options generally or on high-frequency trades, while reducing it for cash trades in the budget, said Jasani.
Apart from the surge in retail participation, the survey highlights privacy concerns, cybersecurity risks and the growing digital divide as issues needing attention.
