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Transaction tax - who all will be hurt?

Poornima Mohandas

Mumbai , July 10

WHO will bear the brunt of the transaction tax in the Indian debt markets in case it gets imposed? Market players, brokers, corporates and the Government itself, say experts.

The ripples spread far and wide; this is how it will work. The transaction tax will mean that each trade will cost over Rs 75,000 for a minimum lot size of Rs 5 crore. This will prompt traders to increase their spread.

With wider spreads, G-sec prices will fall and yields will rise. Another reason for fall in prices will be the illiquidity premium, which will come up since all players would deal on a one-to-one basis and prefer to avoid the broker. The broker would be avoided since he is the one who reports the transaction to the stock exchange, and, thereby making it under the turnover tax umbrella. With the broker gone, trading volumes are expected to drop.

"When the Government comes to borrow it will have to pay a higher yield taking into consideration the liquidity risk. The Government's efforts will then backfire," said a debt market analyst, who did not wish to be named.

"All the benchmark interest rates will move up once G-sec yields rise and so will the borrowing cost for corporates," said Mr S. Ananthnarayan, Vice-President, Kotak Mahindra Capital Co Ltd.

At present, the debt broking community in India feels victimised. "If this tax is imposed the broker will be eliminated. The broking community, which consists of 1,500 to 2,000 people, are in danger of losing their jobs. Brokers had facilitated trades worth Rs 1,00,000 crore in the financial 2004," said Mr C.V. Krishna, Dealer, I-Caps, a debt market broker.

Market players and brokers on Saturday held a meeting in the city before their representations are made to the Finance Ministry on Monday.

"Along with the broker will go fine price discovery because how many players can a dealer talk to before making a deal. The brokers today give us quotes from several players, and, thereby ensure fine pricing," said a dealer.

Even in the developed countries such as the US, the debt market is mostly telephonic with the broker being an integral part of it.

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