Securities and Exchange Board of India (SEBI) released the Development Research Group (DRG) Study entitled to Impact of Increased Derivatives-Trading in India on the Price-Discovery Process on 17 October 2013.
The main recommendations of the Development Research Group (DRG) Study
• The study found that spot-market has been dominating the futures and option markets and that the dominance of futures market over options has diminished after the increase in Securities Transaction Tax (STT).
• The Study proposed that the Securities Transaction Tax should be reduced to give boost to the capital market.
About the Study
• The objective of the study on Impact of Increased Derivatives-Trading in India on the Price-Discovery Process is to examine whether the introduction of financial derivatives led to better price-discovery (PD) in India.
• This study is the first one to analyze individual stock-options in India.
• They studied using synchronous daily spot, futures, and option price on Nifty and ten randomly selected stocks. The study found that, while the spot-market is increasing its dominance over futures and options, the futures market’s dominance over option-market has drastically fallen following the increase in Securities Transaction Tax.
About Securities Transaction Tax
• Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time.
• This would include shares, derivatives or equity-oriented mutual funds units.
• Pursuant to the enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities Transaction Tax Rules, 2004 and STT came into effect from 1 October 2004.