Commodity price slump triggers investor caution
Duties could deter brokers from integrating commodities and securities arms
A slump in commodity prices has triggered risk-off sentiment among global investors, hitting equity markets and pushing up demand for safe-haven assets like gold.
Most Asian and European markets dropped on Friday, while the dollar gained against most emerging market currencies. The benchmark BSE Sensex lost 267 points or 0.9 per cent to end at 29,858.8; the Nifty 50 on the National Stock Exchange fell 74.6 points or 0.8 per cent to 9,285.3. The rupee fell 0.3 per cent to close at 64.37 against the dollar. Foreign investors sold shares worth ~364 crore. Commodity and oil stocks witnessed selling.
While oil and other commodity prices were seen stabilising on Friday, the weekly losses were enough to spook investors, raised concerns over the global economy’s health. A five per cent drop during the week saw Brent crude prices fall to their lowest level since November 2015, erasing all gains since the Organization of the Petroleum Exporting Countries (Opec) signed a six-month deal to curb production and ease a global glut. Surging shale gas output in the US was seen as the trigger for a slump in oil prices. Higher US output threatened to offset the supply cut by Opec and Russia.
The fall in oil prices spread to other commodities. Iron ore lost 12 per cent during the week in Singapore, its sharpest fall since November, when prices had come off on concerns over the demand in China.
Tax implications could deter brokers from opting for a unified licence to operate in the securities and commodities market.
Currently, most brokerages have separate arms for equities and commodity derivatives trading. Last month, market regulator Securities and Exchange Board of India (Sebi) proposed a single licence for brokers to operate in both these segments.
The merging of subsidiaries, however, will attract capital gains tax and stamp duty as the underlying assets, including securities and fixed assets, will undergo a change in ownership.
Transfer of securities held for less than a year into the merged entity will attract short-term capital gains tax of 15 per cent. Any profit arising from transfer of an asset or change in ownership will also face capital gains tax. Fixed assets owned for more than two years will attract 20 per cent capital gains tax adjusted for cost inflation. If the fixed assets are owned for less than two years, the gains will be treated as income of the individual or company.
Besides, brokerages will also be subject to stamp duty during new registration, the amount of which will be decided according to the state laws.
Some experts say a higher tax liability could deter brokerages from opting for the single licence.
“Paying stamp duty and capital gains tax will discourage brokers and they may prefer continuing as separate entities,” said Sandeep Parekh, founder, Finsec Law Advisors.
According to sources, the market regulator has approached the income tax department seeking a one-time tax exemption to help with efforts to have common intermediaries for the securities and commodities markets.
Following the merger of the Forward Markets Commission (FMC), commodity derivatives have come under Sebi’s fold. To provide better synergies, Sebi plans to have common intermediaries for both segments. To begin with, the regulator has proposed common brokers, later other intermediaries like stock exchanges will be integrated.
The regulator is in the process of firming up the final guidelines for the integration of brokers. Sources said while framing the guidelines, Sebi had come across certain issues relating to the tax structure of the integrated entities.
“Some of the brokerages have expressed their concern over tax implications. We are taking views from the IT department,” said a regulatory official. Brokers have approached Sebi seeking a one-time tax exemption similar to that provided during corporatisation in the year 2000. “Tax exemption was granted during corporatisation and demutualisation in 2002. A similar grant may have to be considered this time to enable the merger of commodity and equity arms without incidence of stamp duty and other taxes,” said Alok Churiwala, managing director, Churiwala Securities.