The M R Mayya committee on the development of liquidity in the stock market has urged the government to grant tax incentives to market makers.
The committee, which was appointed by the Federation of Indian Stock Exchanges, said market makers should be allowed to enjoy tax benefits in line with the United States where profits made by market makers on a short term basis were treated as long term capital gains.
The report recommended that the market regulator, Securities and Exchange Board of India, should take up the issue with the Union finance ministry.
The other recommendations in terms of financial incentives include waiver on transaction levy relating to market-making and allotment of 50 per cent of income being generated from market making with the makers.
According to the panel, the lack of liquidity in the market is due to a combination of factors like low capital base of listed companies, reduction in percentage of public offer, introduction of book-building, merger of unlisted companies and classification of shares into Z category.
The committee said market makers had not emerged owing to lack of incentives. It suggested classification of shares into into four categories - liquid, thinly traded, marginally liquid and illiquid.
Shares included in the BSE Sensex and Nifty were liquid stocks. The shares which are traded on at least 90 per cent of the trading days in a year and have a minimum of 10 trades or trades of value of at least Rs 10 lakh (Rs 1 million), may also come under this category.
The shares which are traded on at least 25 per cent of the trading days in a year, may be classified as thinly traded shares and those below the level can be termed as marginally liquid. The balance are illiquid shares.
The committee recommended that market making may be limited to only thinly traded and marginally liquid shares. The committee suggested that financial institutions and banks having their stock broking subsidiaries could be encouraged to play an active role in market-making functions and these functions may result in handsome profits in course of time.
The committee recommended that while there must be a minimum of two market makers in a share to ensure competition, the upper limit on the maximum number of market makers might be fixed at five.
