This article discusses about the NSE-SGX Row and analyses if offshore access to onshore markets can be given through a collaboration with GIFT City which might prove to be a win-win for everyone concerned.
The National Stock Exchange Fifty, also known as Nifty 50, is the flagship index of the India Index Services & Products Limited (IISL). It is a diversified 50 stock index accounting for 12 major sectors of the Indian economy. Changes in the stock index are a proxy for changes in the value of the market.
Exchange traded derivative contracts linked to Nifty 50 have been traded at Singapore Exchange Limited (SGX) in accordance with the licensing agreement entered into between NSE and SGX since 2001. As SGX is deeply regulated, it offers lower trading costs, tax rates and deep and liquid markets attracting interest of investors from across the world.Such overseas listing has proved beneficial for India as it expands markets for the index futures and allows trading in multiple time zones and currencies,increasing the liquidity of the issuing company. NSE has been providing data to SGX for the derivative product, which is used by the foreign investors looking to hedge exposure to the Indian stock market.
The signs of resistance from NSE became evident in January 2018, when SGX was asked by NSE to delay the introduction of its single-stock futures – which would track India’s largest companies and help investors enhance their stakes in specific entities rather than in a broad index. NSE was asserting its right on its flagship index and was trying to draw trading back to India. However, when it was introduced, NSE, BSE and Metropolitan Stock Exchange of India (MSEI) cancelled their offshore agreements, barring SGX from trading in Nifty 50 futures and IISL decided to cease the supply of information to SGX. In order to circumvent the problem, SGX announced the launch of three new derivative contracts called, SGX India, SGX India Options and SGX India Bank Futures. The purpose was to fill the vacuum created by the ban on supply of data by IISL. NSE raised concerns regarding the launch of the said product as it would amount to misappropriation of its proprietary creation, the Nifty 50.
After making no headway, NSE filed a suit in the Bombay High Court which passed an interim order restricting SGX from launching the new derivative contracts till further notice and referred the matter to arbitration. Justice S.J. Vazifdar ruled on June 14,2018 that the current licence agreement between the parties will continue for two months after the final arbitration award and stated that during the period and for three weeks after the award, SGX will be unable to launch its contested India-specific products
The dispute has had negative impact on Nifty futures trading since February, coincidentally the month in which the NSE announced to cease the agreement with SGX.
The number of available financial instruments to hedge the risk of exposure to Indian markets will reduce drastically and will disrupt international institutional confidence. Elimination of competition and diversion of liquidity to Indian shore market will not help in enhancing the credibility of the Indian exchanges, neither is barring trading of derivatives in the overseas market an effective way to ensure liquidity in the domestic market.
If SGX loses the legal battle, it will lose revenue which it earned through trading in Nifty derivatives. It will also lose some clientele which specifically traded Nifty on its platform.Further, if the trading is to shift to Gujarat International Fin-Tech(GIFT)City, revenue loss can be anticipated as other countries are likely to follow NSE’s footsteps.
Investors always seek a financial center for investment which has a stable economic and regulatory regime. International financial centers with convertible currency and competitive tax rates attract investors. However, legal challenges give rise to uncertainties which make the destinations unattractive and can result in reversal of investment to the detriment of all. With the prevalent legal challenges, many investors may have to incur additional expenses and register in India.
The NSE, along with the Center has been preparing to shift investors to platforms on the Indian shore. Certain exemptions have been provided, such as the Part 30 exemption order which allows institutional investors based in US to trade in Nifty futures in India, who earlier had to invest in these derivatives through overseas exchange platforms.Further, the Securities and Exchange Board of India (SEBI) has permitted trading in derivatives till 11:55 pm. Moreover, the exemption of short-term capital gain tax on derivatives being traded on GIFT IFSC exchanges will also lead to removal of roadblocks in directly accessing Indian markets.
The GIFT City is India’s first operational smart city and international financial services centre which offers lower tax rates and less documentation. An IFSC is a jurisdiction that provides financial services to non-residents and residents, to the extent permissible under the current regulations, in any currency except Indian Rupee.
There are currently three regulating bodies in GIFT City – Reserve Bank of India for the Banking Sector, Insurance Regulatory and Development Authority of India for Insurance and SEBI for capital markets and asset management.
The SGX and the NSE have also abandoned talks on a cross-border trading link between the SGX and the GIFT City. Media reports suggest that the companies could not reach a consensus on the issues of timing, the regulatory framework and the resource commitment needed to make the project operational. The collaboration would have enabled traders in Singapore to trade derivatives in the GIFT City.
In a typical connect between two exchanges, investors can trade contracts of another market through the trading and clearing infrastructure of their home exchange. For Nifty,the likely construct will be one that allows SGX’s customers to trade dollar-denominated contract listed at Gandhinagar, by using the infrastructure at Singapore. SGX, in turn, will be connected with NSE’s exchange at GIFT City.For all practical purposes, SGX will act as a trading member on it, and clear and settle trades on behalf of NSE.
If regulators agree, a connect can be a win-win for all concerned. NSE’s exchange in GIFT City will get a boost when SGX’s liquidity pool starts interacting with its up-and-coming pool of liquidity.
CONCLUSION
The NSE-SGX dispute has been making headlines for a long time now. A collaboration between SGX and NSE in GIFT City can be very helpful in providing offshore access to onshore markets and can be beneficial for both the parties. Many institutional investors are reluctant to invest directly in India and prefer SGX’s India securities. The NSE-SGX relationship has always been a symbiotic one. SEBI and Singapore’s integrated financial regulator Monetary Authority of Singapore have discussed amicable resolution of the NSE and SGX issue, among various issues of cooperation. The regulators agreed that the collaboration between the authorities would be further strengthened so as to derive benefits for capital markets of both the countries.This can also lead to a potential collaboration in GIFT city in order to bring liquidity from offshore markets to GIFT city.
This article is written by
Hitakshi Mahendru & Neha Vijay Pilay
of Symbiosis Law School, Pune
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