In a significant market development, shares of brokerage-linked and exchange-related companies experienced a sharp decline of up to nearly 12 percent following Finance Minister Nirmala Sitharaman's proposal to increase the Securities Transaction Tax on derivatives in the Union Budget 2026-27. The announcement triggered heavy selling pressure across the sector, reflecting investor concerns about higher transaction costs and potential impacts on trading volumes.
Budget Announcement Sparks Market Sell-Off
During her Budget speech, Finance Minister Nirmala Sitharaman revealed plans to raise the STT on futures contracts from 0.02 percent to 0.05 percent. This measure is specifically designed to address excessive speculation within the futures and options segment, particularly focusing on protecting small investors who frequently incur substantial losses. The government's approach aims to discourage speculative trading while maintaining support for legitimate market activities.
Major Declines in Brokerage Stocks
The market reaction was immediate and pronounced. On the Bombay Stock Exchange, Multi Commodity Exchange shares plummeted by 11.60 percent to close at Rs 2,232.15 per share. Angel One witnessed a significant drop of 8.61 percent, settling at Rs 2,320, while IIFL Capital Services declined by 8.06 percent to finish at Rs 303.80. Other notable declines included Billionbrains Garage Ventures, the parent company of Groww, which fell 5.11 percent to Rs 168, and Anand Rathi Share and Stock Brokers, which decreased by 2.03 percent to Rs 567.
On the National Stock Exchange, shares of BSE Ltd ended 8.12 percent lower at Rs 2,570 per share. The broader equity market also faced substantial pressure, with the 30-share BSE Sensex plunging 1,546.84 points, or 1.88 percent, to settle at 80,722.94. Similarly, the NSE Nifty dropped 495.20 points, or 1.96 percent, to close at 24,825.45, indicating widespread market apprehension about the proposed tax changes.
Government's Rationale Behind STT Increase
Addressing concerns during a post-Budget conference, Finance Minister Sitharaman clarified that the government does not oppose derivatives trading but seeks to discourage excessive speculation, especially among small investors facing significant financial losses. She emphasized that this nominal increase specifically targets speculative activities to deter such investments. According to studies by the Securities and Exchange Board of India, over 90 percent of retail investors' trades in the F&O segment result in losses, highlighting the need for protective measures.
Impact on Transaction Costs and Market Participants
Market experts have expressed concerns that the proposed STT increase will raise transaction costs across the derivatives market, affecting both retail and institutional participants. Ashish Singhal, Co-founder of trading and investment platform Lemonn, explained that the taxation change could impact both hedging activities and speculative trading. He noted that the current STT framework does not differentiate between various types of users or the purposes behind derivatives usage, potentially discouraging prudent hedging strategies and increasing market risk exposure.
Singhal provided specific examples of the cost implications: "For every Rs 1 lakh worth of futures sold, traders now pay Rs 20 in STT instead of the previous Rs 12.50, and for a Rs 10,000 option contract sale, STT increased to Rs 10 from Rs 6.25." He acknowledged the policy intent to curb excessive speculation but highlighted the absence of differentiation between risk-management-driven participation and speculative trading as an important policy consideration.
Industry Response and Business Resilience
Despite the immediate market reaction, industry executives indicated that diversified business models could help mitigate the impact of higher derivatives trading costs. Amit Majumdar, Group Chief Strategy Officer at Angel One Ltd, revealed that his company has strengthened its revenue mix beyond F&O trading. "We have transformed Angel One into a diversified franchise spanning wealth, credit, asset management and soon insurance, adding steady, diversified revenue streams," Majumdar stated.
He further explained that in the third quarter of fiscal year 2026, F&O brokerage contributed approximately 44 percent of their gross revenue, while interest income from client funding and their broader platform accounted for around 33 percent. The remaining revenue came from cash and commodity broking, depository services, distribution, and other income streams. This diversified approach reinforces business resilience and maintains confidence in their broader trajectory despite regulatory changes.
Broader Market Implications
Market analysts suggest that the STT hike signals the government's clear intent to rein in speculative excesses within the derivatives segment. This move has sparked ongoing debates about balancing investor protection with market liquidity and hedging efficiency. While the immediate impact has been negative for brokerage stocks, the long-term effects on market behavior and investor protection remain to be seen. The government's focus on protecting small investors from substantial losses in derivatives trading represents a significant policy shift that could reshape trading patterns and risk management approaches across India's financial markets.
