SEBI Chief Warns: Household Savings Flowing into Speculation; 30% Tax on F&O Gains Proposed in Budget
Increase in Individual Traders in FY 2022 Compared to FY 2019
The number of individual traders increased by over 500% in the financial year 2022 compared to FY 2019. During this period, 90% of active traders experienced an average loss of Rs. 1.25 lakh. This information was revealed in a SEBI report on the profits and losses of individual traders in F&O, published on January 25, 2023.
Risks of Uncontrolled Retail Trading in F&O
Finance Minister Nirmala Sitharaman, in a program in May 2024, emphasized the potential challenges posed by an uncontrolled explosion of retail trading in F&O. She stated, “Any uncontrolled explosion in retail trading in F&O could pose future challenges not just for markets but also for investor sentiment and domestic financial matters. We want to keep it safe and ensure that happens.”
Substantial Losses for Young Traders in Speculative Trading
Capital market regulators are being “compelled” to warn against speculative bets in the F&O segment as it has become a macro issue affecting the economy, not just a micro issue affecting individual investors. Domestic financial savings are being diverted to speculative trading, leading to significant losses for young traders. SEBI Chairperson Madhabi Puri Buch highlighted this concern.
Nilesh Shah of Kotak Mutual Fund also pointed out that F&O activities are impacting both micro and macro levels. He noted, “Savers have turned into speculators rather than investors. Micro issues are like AC problems that only affect you, whereas macro issues affect everyone.”
Increased Retail Participation in F&O is Concerning
These statements and SEBI’s research report indicate that the rise in retail participation in F&O is not favorable. Consequently, the government might classify F&O trading as ‘speculative’ income in Budget 2024, potentially imposing a 30% tax rate on it.
High Risk, High Return Investments
Speculation involves buying assets (commodities, goods, or real estate) with the risk of losing value but also the potential to gain value in the near future. These are high-risk, high-return investments typically made for short-term gains.
What are Futures and Options?
Futures and options (F&O) are financial instruments allowing investors to take large positions in stocks, commodities, and currencies with minimal capital. F&O are types of derivative contracts with specific expiration dates, and their prices fluctuate according to stock prices. Each share’s futures and options are available in a lot size.
