Sitharaman’s Push to Tame F&O Trading Backfires as Broker Stocks Sink 13%

Finance Minister Nirmala Sitharaman on Sunday defended the sharp increase in Securities Transaction Tax (STT) on futures and options (F&O) trading announced in the Union Budget 2026-27, saying that unchecked speculative activity in the derivatives segment posed systemic risks and could hurt small retail investors if left unchecked.

Sitharaman characterised excessive F&O speculation as “satta highly risky gambling-like activity,” and argued that the government could not afford to remain passive while a large number of small investors suffered significant losses due to leveraged derivative trades. According to her, raising STT was intended to temper speculative excesses and protect retail savings.

Details of the STT Hike on Derivatives

In the budget speech, the finance minister proposed a significant hike in STT on futures. The STT on futures contracts was raised from 0.02 % to 0.05 %, representing a more than 150 % increase, while the STT on options premium and exercise was increased to 0.15 % from earlier rates of 0.1 % and 0.125 %, respectively.

She emphasised that the nominal increase in STT is aimed at deterring excessive speculation, not penalising broader market activity, and that regulation of the broader market remains the domain of the market regulator.

This move was aimed at discouraging excessive speculation and bringing greater discipline to the derivatives segment, which has seen exponential volume growth in recent years. The finance minister said that derivative trading had attracted risk-seeking activity that did not contribute to productive capital formation.

Revenue Department on Systemic Risk

Arvind Shrivastava, Secretary in the Department of Revenue, said that the hike was designed to address systemic risk concentrated in the derivatives segment. He explained that the volume of F&O transactions, relative to the size of India’s GDP and the underlying cash markets, suggested a high level of speculative activity that often resulted in losses for small and unsophisticated investors. Shrivastava added that even after the hike, STT rates would remain relatively modest compared to the scale of F&O transactions

Market Reaction and Sell-off

Financial markets reacted sharply to the special weekend trading session following the announcement. Shares of major brokers and stock exchange operators were hit, with BSE, Groww (Billionbrains Garage Ventures) and Angel One falling as much as 13.5% during the session as investors repriced expectations of future earnings and trading volumes.

By the end of the session, BSE shares were down 8%, while Angel One declined 8.6%, reflecting investor concerns that higher levies on derivatives trading could dampen activity in a segment that has become a key earnings driver for exchanges and retail brokerages.

Vishad Turakhia, Chief Executive of Equirus Securities, said BSE generated about 60% of its revenues from equity derivatives in H1 FY26, while Angel One derived nearly 75% of its broking revenues from F&O in the first nine months of FY26. He added that Nuvama Wealth could also be impacted, with asset services contributing around 23% of revenues, where income is linked to derivatives activity.

Liquidity, Volumes and Foreign Flows

Market participants and experts warned that higher transaction costs could lead to lower derivatives volumes, as hedgers, arbitrageurs and high-frequency traders re-evaluate their trading strategies. Shripal Shah, MD & CEO of Kotak Securities, said the steep increase on top of last year’s hike could raise impact costs for traders and potentially cool derivative activity, with any incremental revenue gain offset by reduced market participation.

The higher STT on derivatives is also expected to weigh on near-term foreign portfolio investor (FPI) flows, particularly among funds that rely on high-frequency and derivative-heavy strategies. Market participants said the increase in transaction costs could further reduce the attractiveness of Indian derivatives for short-term global investors.

Aakash Shah, Technical Research Analyst at Choice Equity Broking, said the STT hike in futures and options is “likely to act as a marginal negative for foreign portfolio investor flows in the near term, particularly for high-frequency and derivative-focused global funds”.

He pointed out that FPIs had already recorded equity outflows of over ₹41,000 crore in January 2026, amid global risk-off sentiment, elevated U.S. bond yields and currency pressures. Shah added that higher transaction costs further compress post-tax returns for short-term foreign investors, potentially discouraging participation in India’s derivatives market.

What Does it Mean for Investors?

Traders expressed concerns that an increase in STT may cause a decrease in the volumes of derivatives since traders would re-examine the economics of short-term and high-frequency trades. Analysts also flagged the risk that foreign portfolio investors, particularly those active in derivatives, may scale back participation if post-tax returns weaken.

This comes at a time when foreign investors have already shown caution towards Indian equities amid global uncertainties, making cost sensitivity in trading strategies more pronounced.

The STT hike marks one of the most significant policy interventions in India’s derivatives market in recent years. Market participants will closely monitor changes in F&O trading volumes, earnings impact on brokerages and exchanges, and investor participation trends in the coming months to assess the longer-term effects of the higher levy.

Sources

Economic Times

Money Control