Sunday, March 17, 2013


By Subash Agarwal, Advocate

 “Whether the trading in Futures transactions in currencies is a business transaction and not a speculative transaction and losses incurred therein can be set-off with other business income?”

Before giving the answer, let us first analyse the relevant provisions of the Act and the applicable judgements of the Courts, if any and the said analysis is done hereunder-

1.           Futures transactions in currencies are no doubt business transactions because of the profit motive, regularity and volume involved. But it is imperative to see whether such transactions are “speculative” in nature since the losses in speculative transactions can be set-off only against “speculative” profits and against no other head of income.

2.           As per section 43(5), “Speculative transaction” means-
"a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips”.

3.           Though from the plain reading of the above definition of “speculative transaction”, the future transactions in currencies appear to be speculative in nature, but it is imperative to analyse the clause (d) of the proviso appended to section 43(5) which carves out exception to the above- stated rule.
Clause (d) states that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognised stock exchange shall not be deemed to be a speculative transaction;
Further, the meaning of the term “eligible transaction” has been explained in the “Explanation” appended to section 43(5). Since the transactions made in the recognized stock exchanges conforms to the criteria laid down for making the transactions eligible, it is not necessary to discuss the same.

4.                It is worthwhile to note that section 2(ac) of the Securities Contracts (Regulation) Act, 1956 defines “derivatives” as under-
“derivative" includes -

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;

From the above, it is clear that “Futures” and “Options” are part of derivative transactions. Since the value of such contracts varies with the price of the underlying security viz., shares, exchange rate / currency rate. In DCIT vs. Paterson Securities (P) Ltd. 127 ITD 386 (Chennai), it was held that a derivative is a financial instrument, the price of which has a strong correlation with an underlying commodity, currency, economic variable or financial instrument. The different types of derivatives are “future contracts and options”.

5.                    A confusion may arise as to whether “currency futures” is part of the term “derivative” as defined in section 2(ac) of SCRA, particularly when the term currency is not figuring therein. There are various reasons to come to the conclusion that “yes, it is!”. The reasons are-

(a)     The definition of “derivative” in section 2(ac) of SCRA is an inclusive definition, which means that any other item conforming to the given characteristics will also qualify to be a “derivative” transaction.

(b)    SEBI was constituted by the Government to protect the interests of the investors in securities and to promote the development of, and regulate the securities market (see Function of the SEBI as per section 11 of the SEBI Act, 1992).

But SEBI has also been regulating the currency derivatives as evident from the undernoted Press Release / Circular-

Ø  Press Release No. 297/2007 dated 14.11.2007.
SEBI approves new derivative products viz., Options & Futures in shares and Exchange traded currency Futures & Options.
Ø  SEBI / DNPD / Circular-38/ 2008 dated 06.08.2008
Guidelines issued for trading in Exchange Traded Currency Derivatives.

(c)    Earlier, the Central Government had notified vide Notification No. S.O. 1327 (E) dated 22.5.09, the MCX Stock Exchange Ltd., which provides India-wide electronic platform for trading in currency futures under the regulatory control of SEBI and RBI, as a recognized stock exchange for the purpose of section 43(5), clause (d). (Earlier notification dated 25.01.2006 was in respect of NSE / Bombay Stock Exchange, which dealt in ,inter alia, in derivatives relating to shares  and also currencies).
Then  after  United Stock Exchange of India (USE), the fourth pan India exchange, was launched for trading in financial instruments in India and received final approval from the market regulator SEBI to start currency futures trading, the Central Government has notified vide Notification No. 12/2011 dated 25.2.11 the said stock Exchange also as a recognized stock exchange for the purpose of section 43(5), clause (d)

It is worth noting that MCX Stock Exchange Ltd. (MCX-SX)  should not be mixed-up with the Multi Commodity Exchange of India Ltd., which is currently providing a platform for trading in commodities only. Commodity derivatives are so far outside the ambit of sec 43(5), clause (d).

Thus the intention of the government is also to consider currency as part of “Securities” for all practical and legal purposes.

               In view of the above discussion, it can be concluded that “Futures” transactions in currencies traded in the trading platform of the four recognized stock exchanges viz., National Stock Exchange , Bombay Stock Exchange , MCX Stock Exchange and United Stock Exchange of India  are business transactions and not speculative transactions and loss arising there from can be adjusted against any other business income including speculative income.


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