STT waiver likely for stock lending scheme

NEW DELHI: The income tax department is likely to give the securities lending and borrowing (SLS) scheme a waiver from the Securities Transaction Tax (STT).

This means domestic and foreign institutional investors will be able to borrow and lend shares in the stock market, without having to pay STT on every such transaction.

The finance ministry will issue a notification after the Securities and Exchange Board of India (Sebi) approves the launch of the SLS, possibly at its next board meeting. The Sebi board has already discussed the SLS issue at its last meeting.

The issue was sorted out between the I-T department and the market regulator in a meeting last week, said a source close to the developments.

The problem arose as the securities lending scheme, which in its first avatar was launched in 1997, was restricted to only individuals and not the institutional investors. The SLS permits entities to borrow and lend securities to meet settlement shortages.

But the STT introduced in ’04 imposes a tax on all stock market transactions. It does not exclude securities lending and borrowing from its ambit.

The government reckons that if the securities lending scheme now takes off, a dispute could emerge between the big players and the I-T department on this issue.

So it has decided to write in a clause, formally excluding all such transactions from the purview of the STT.

Sources said the income tax department had also agreed that lending and borrowing of securities were not akin to buy and sell transactions.

The sources said as this involves a change in the direct tax laws, the government may introduce an amendment in Parliament in the monsoon session to the Finance Act, ’06.

To give a fillip to the derivatives market, the Sebi has decided to expand the scope of the SLS. The derivatives market acts as a weather vane for the spot market and to that extent the regulators feel it works as a good indicator of incipient volatility in the spot markets.

The SLS will allow institutional investors like the FIIs to undertake short selling (securities they do not own at the time of sale).

The plan is to allow short sales in F&O stocks, with the clearing house corporations being the authorised intermediaries for the scheme. They will provide the platform for those who want to either lend or borrow stocks.