High trading costs impact liquidity of Indian equities: World Bank

As per latest study by World Bank, the turnover ratio of Indian stock market has fallen significantly by 60% in past 10 years. The turnover ratio fall has been higher in India in comparison to some of the other leading markets of world.

Key Highlights of Study

Turnover ratio of Indian stock market had fallen from 143 in 2008 to 58 in 2018 which means a fall of nearly 60% between 2008-2018 decade.

Although the ratio had managed to move up in last 5 years but it is still quite low when compared with earlier highs.

The fall had been highest among most leading markets of world, except United States (US) and European Union (EU).

Other Countries: Between 2008 and 2018, China’s turnover ratio fell less than 6% in last 10 years; Brazil (12.85%) and South Korea (31.12%), Japan and Hong Kong saw ratio dip between 40-50%.

Significance: Key analysis by WB study assumes significance as market participants have been lobbying hard with central government to reduce overall cost of trading in equities in India, which, they feel, is adversely affecting investors’ interest in stock market.

Background

In 2007-08, central government stopped treating Securities Transaction Tax (STT) as tax paid and rather treated it as an expense that led to double taxation for gains assessed under business income. Moreover, while introducing STT in 2004 the Long-Term Capital Gains (LTCG) tax was made nil but STT was not done away with when LTCG was reintroduced in 2018.

Way Forward for India

The capital market participants had sought rationalisation of STT apart from bringing back certain exemption benefits that were available earlier.

What is Turnover Ratio?

It is a universally accepted parameter to measure trading volumes. It is the total value of shares traded in a specific period divided by average market capitalisation of that period. It indicates how easy, or difficult, it is to sell shares of a particular stock on capital market.

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