A study commissioned by market watchdog Securities and Exchange Board of India (Sebi) has suggested lowering of securities transaction tax (STT) to boost the capital market.
The study, conducted by independent experts for Sebi's Development Research Group, found that spot-market has been dominating the futures and option (F&O) markets and that the dominance of futures market over options has diminished after the increase in STT.
"STT on protective-put and hedged-call positions should be reduced to give boost to the option market," according to the study.
STT, which was introduced in 2004, is levied on the sale and purchase of equities.
The government, in March, had lowered the STT by 20 per cent to 0.1 per cent from 0.125 per cent, in a bid to bring down costs of equity transactions.
According to estimates, STT accounts for 51 per cent of the transaction cost in stock markets.
The present study examined the impact of increased derivatives trading in India on the price-discovery process by studying F&O on NSE Nifty and 10 other randomly-selected stocks on the exchange.
The study has been co-authored by Banikanta Mishra, Sarat Malik and Laltu Pore and is part of an initiative undertaken by the market regulator to commission studies on different aspects affecting the capital markets.