SGX move could trigger diplomatic row between India, Singapore

Bourse plans to launch futures trading in Indian stocks

Diplomatic tensions between India and Singapore could flare up over Singapore Exchange’s (SGX’s) proposal to soon launch futures trading in Indian stocks. SGX would soon go live with the launch of single-stock futures on top 50 domestic companies and would expand the universe to top 100 eventually.  

The move comes despite efforts made by several Indian stakeholders such as the finance ministry and National Stock Exchange (NSE) to dissuade SGX against the launch. The Centre fears the move could lead to further export of Indian financial markets, hurt tax collection, and impact liquidity in the domestic market. Although the Indian authorities cannot take any legal step against SGX, they have tried to stave off the move via diplomatic means. The launch seems to have rubbed the Indian authorities the wrong way, said three people in the know. 

According to sources, SGX has been toying with the idea to launch derivatives trading in Indian stocks for a few years. However, the bourse had been holding back to an informal understanding with the Indian government and NSE. 

Two recent developments are said to have once again prompted SGX to firm up the plan. These include market regulator Securities and Exchange Board of India’s (Sebi’s) ban on participatory notes (p-notes) from taking naked derivative positions in the Indian market. The second being renegotiation of the double tax avoidance agreement with Singapore. The new tax treaty stripped off the tax advantage Singapore-based investors enjoyed.

“There is nothing that can legally stop SGX from launching derivatives on Indian stocks. The prices for all domestic stocks are publicly available,” said a source. “In the wake of the amended tax treaty and p-note ban, there is a high demand from investors to trade in Indian stocks on a platform like SGX, where transaction costs, compliance requirements, and taxation are far more favourable.”

“As a highly liquid, offshore risk management centre, SGX remains committed to complementing the primary domestic market for hedging of Indian equity exposures,” SGX said in a response to Business Standard’s query on the impending launch.

NSE didn’t respond to a questionnaire sent on the development. Currently, SGX offers derivatives trading, based on the Nifty index. The trading volumes on SGX are nearly the same as that in the home market — NSE. 

Nifty futures trading on SGX is available almost round-the-clock, helping investors across different time zones. On the other hand, NSE allows derivatives trading for 6.5 hours, in tandem with the cash market. Ajay Tyagi, chairman, Sebi, also touched upon this issue at a recent financial market event organised by industry body Confederation of Indian Industry.  “I agree that Indian markets are facing stiff competition from Singapore. The trend is linked to cost of transaction and ease of doing business, which we are trying to improve,” he said.

Not just Singapore, but financial centres like Hong Kong, Dubai, and Chicago have over the years launched products based on foreign securities. Typically, these are derivative products where the underlying security is listed in a foreign jurisdiction.

Such products are suitable for trading or hedging, however, don’t allow buying direct equity in the company. So far, most global exchanges have only launched trading on domestic indices. However, none of them offer single-stock futures. 

India’s answer to such finance centres was the launch of an international finance centre at Gujarat International Finance Tec-City (GIFT). The government removed several tax levies such as the securities transaction tax for overseas investors trading from GIFT. Both NSE and BSE have launched operations at GIFT and even offer trading in overseas single stocks such as Google, Apple, and Facebook.

The volumes, however, are yet to take off in a big way as transaction cost at GIFT, though cheaper than the onshore market, is still expensive, compared to global financial centres.