MUMBAI: The Securities & Exchange Board of India (Sebi) is expected to issue a circular on the operational framework and modalities for launch of commodity options by exchanges like NCDEX and MCX in a fortnight, a person aware of the development told ET. The regulator has also taken up the tricky issue of options’ taxation with the Central Board of Direct Taxes (CBDT), he added.
The circular will contain, among others, design of the new contracts, number of commodities on which options can be launched, product turnover criteria and the date of devolvement – conversion of options into futures contracts.
“The circular is likely to be issued in a fortnight’s time,” the person said. A Sebi official was not available for comment. The finance minister announced the launch of options for commexes in the Union Budget FY17 to get more farmer participation and to deepen the market.
However, an important aspect to be tackled before exchanges launch options will be tax treatment. Unlike in the equity market, where Sebi regulates both the cash and derivatives (F&O) segments, in commodities it regulates only the futures market, with regulation of spot markets left to the respective state governments.
Thus, it will launch options which has a futures contract as an underlier and which gives the holder the right to convert the option into a futures contract. Herein lies the problem. Securities transaction tax and commodity transaction tax on sellers of futures contracts is 0.01 per cent (1 paise per hundred rupees on traded value). Seller of an equity option is charged 0.05 per cent (5 paise Rs 100) STT on option’s premium, which works out much lower than that on futures. However, exercise of an option attracts a much larger STT of 0.125 per cent (over 12 paise per Rs 100). This is levied on the option purchaser.
Since the option has a futures contract as an underlier, market participants fear that option buyers who chose to convert their options into futures contracts will be slapped with a much larger tax since that will be deemed as exercise of the option. This may discourage participation on the new product, they feel.