SGX-NSE row: Why GIFT in PM Modi's backyard makes no sense ahead of Mumbai

SGX was asked by the Bombay HC on Tuesday to suspend the June 4 start of its new India equity derivatives and try to settle its dispute with NSE via arbitration

A stock connect between India and Singapore, modeled on the popular Shanghai-Hong Kong link, died before it could be born. Blame a mix of chest-thumping nationalism on the Indian side and political naivete on the part of the Singaporeans.

Singapore Exchange Ltd. was asked by the High Court in Mumbai on Tuesday to suspend the June 4 start of its new India equity derivatives and try to settle its dispute with National Stock Exchange of India Ltd. via arbitration. The NSE objects to the SGX replicating the popular SGX Nifty 50 derivative contract by using publicly available settlement prices on the Indian bourse. At the same time, the NSE doesn't want to maintain an 18-year-old licensing agreement with SGX. Hence the impasse.

The arbitrator will try to find a solution by June 16. But don’t hold your breath. Even Singapore’s central bank is finding it hard to conceal its disappointment. “The range of available financial instruments for investors to hedge exposures and manage risks in Indian equities will be reduced,” the city-state’s regulator said in an unusual late-night statement. MSCI Inc., which has already made known its displeasure with the Indian exchange’s adventurism, is bound to take note.

So what alternative is NSE offering global investors who can’t or won’t participate onshore in Mumbai? Gift City . It’s a brand-new international financial center in Prime Minister Narendra Modi’s home state of Gujarat. Pushed into a corner, SGX was prepared to do a connect with Gift, but now even those plans are dead.

If deepening its markets was the real objective, India would be pursuing a connect between Singapore and Mumbai – a more logical choice than Gift, since all major Wall Street banks are present in those centers.

This year, investors have used the northbound pipe from Hong Kong to buy an average $900 million of Shanghai stocks every day. Flows from Singapore into index and single-stock futures in Mumbai would have meant more wealth and jobs for the city.

But plans for an international financial center in Mumbai, announced with much fanfare in 2015, are on ice, according to an Economic Times report last week. Ministers and bureaucrats don’t want to talk about a rival to Gift any more, presumably because nobody wants to be seen denying Modi his “vanity project.” That’s Percy Mistry’s characterization, not mine.

Mistry’s criticism counts. In 2007, he headed the committee that provided a blueprint for turning Mumbai into an international financial center. “All that's needed now,” as I optimistically wrote back then, “is an influential champion of the cause, someone who would keep up the pressure on short-sighted politicians and phlegmatic bureaucrats until every single recommendation of the report has been implemented.”

Mumbai never got that champion. But a patch of wilderness near Gujarat’s capital, Ahmedabad, clearly did. So imagine the plight of Asia equity derivatives folks at Wall Street broker-dealers, trying to convince their bosses to set up a second office in India in a place nobody in New York has ever heard of in order to create liquidity for clients.

And what a time to make that pitch: Europe is repeating its 2012 meltdown; Trump is back to threatening China with a trade war; the Middle East is on the boil; the Federal Reserve is still in tightening mode; and investors are fleeing emerging-market risk. So India wants all its equity derivative trading to go to … the boondocks.

SGX clearly underestimated the zeal with which Gift was promoted. If SGX hadn’t alarmed New Delhi by planning its own suite of India single-stock futures, and instead proposed a stock connect with NSE's Gift unit, it would still be in business with the NSE. Intermediaries that deal in Indian derivatives – as well as hedge funds that use them – would have trusted the Singapore bourse, and gone into Gift.

Now that marriage has broken down irretrievably, participants are being asked to close their eyes and jump into a new market that’s not even properly regulated. (India’s finance minister promised to establish a unified regulatory authority for Gift and other international financial centers in his budget speech in February; for now there is none.)

All I hear these days is how Gift is no different from Singapore. It has no capital-gains taxes; if you have an existing relationship with a big bank anywhere outside India, it could switch on your Gift access without further “know-your-customer” hassle. It’s ironic that in order to make Gift work, India’s long-standing concerns about round-tripping of domestic cash and money-laundering seem to have been given a quiet burial. Poor Mumbai. It never stood a chance.