According to finance ministry sources, the main issue pertains to trading in government securities where off-market trades under the Negotiated Dealing System are legal, unlike in the equities segment where off-market transactions are illegal. "This creates a distortion and needs to be addressed," a source said.

"NDS accounts for almost 35 per cent of the bond market trading," said the source, adding that these trades were spared from the 0.15 per cent transaction tax.

However, bond deals in the wholesale debt market in the National Stock Exchange and the Bombay Stock Exchange, which account for 65 per cent of the total trade, are subject to the 0.15 per cent tax on transactions.

The ministry is aware that the margins even in long-term government securities are low and it also acknowledged that the transaction tax would hit the short-term bond deals.

An option could be to restrict the transaction tax to the equities market and let the present system continue for the debt market, the sources said.

Another option, the sources said, was to have two different transaction tax rates, the 0.15 per cent tax per transaction for the equity segment and a much lower one for the debt segment.

Senior finance ministry officials had to intervene on Friday and call up bankers and primary dealers when they saw that there was nil trading in the wholesale debt market segment of the NSE and the BSE, as well as the NDS till about 2 pm.

The sources said that officials told the brokers and the dealers over the telephone that the Finance Bill 2004 had not yet been passed by Parliament.

"This must have given all the brokers and dealers a ray of hope," said a source. But despite serious convincing by North Block, trading remained negligible during the day closing with zero transactions in the WDM and a meagre Rs 105 crore (Rs 1.05 billion) worth transactions in the NDS, where the 0.15 per cent transaction tax is not applicable.

Primary dealers, who account for a third of the total trading in the G-Sec segment, said that trading was unlikely to pick up unless the government clarified on the transaction tax issue.

A top primary dealer said they operated on a spread which was as low as 2-5 paise. With the 0.15 per cent transaction tax, PDs fear the bid-offer spread to widen which would make the markets illiquid, he added.

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