"Sebi has already taken up the issue with the ministry as, under the presenttax norms, speculative activity attracts higher amount of tax when comparedto `profit and gains arising from business activity' and, thus, discouragesbroader investor participation. Even many market operators have beenexpressing concern over the issue," Sebi board member Prof JR Varma told TheFinancial Express here.

If the required changes are effected in the Finance Bill to be presentedalong with the budget by Union finance minister Yashwant Sinha on February28, it would pave the way for facilitating entry of foreign institutionalinvestors (FIIs), financial institutions (FIs) and mutual funds (MFs) intothis segment.

The anomaly is perceived to be a hindrance to the growth of trading inderivative products, which were launched by BSE and NSE in June 2000. Thoughthe total turnover in BSE Sensex and S&P CNX Nifty indices based futures puttogether has touched a record Rs 87 crore on Friday last (February 23), theaverage trading during January 2001 was at about Rs 30 crore per day.

Now only two FIs - Industrial Development Bank of India and ICICI - areknown to be participating in the derivatives segment. According to an expertwho wished not be quoted, the main problem posed by this norm was that itdoes not allow setting off any loss arising out of the so called speculativeactivity against any other gain or profit, except another speculativegain.

Besides, the norm also affects FII activity in the derivatives market inanother way. The incidence of tax in this case is sometimes as much as 50per cent of the gain. As it is, it is not possible for the FII to set offtheir speculative losses against any other income as their activity in thecountry is mostly limited to a few sectors in the capital market. Statingthat the market was expecting that the Centre would address the issue inthe forth coming budget, a market operator said that it would be better, ifit could be treated on par with the short-term capital gains for taxpurposes.