STT cut may not dent Singapore Nifty volumes

For, note experts, SGX has other pluses, too, apart from the trading cost advantage, which would remain

The cut in Securities Transaction Tax (STT) on equity futures trades announced in the Union Budget seems unlikely to result in a shift in activity from the Singapore Exchange (SGX) to the National Stock Exchange (NSE).

Brokers said foreign investors are likely to continue trading Nifty futures on the SGX (they're listed on the latter, too), as trading costs in this country despite the STT cut remain higher. There are also other SGX advantages.

Activity in these Nifty futures on the SGX has been on the rise in the past year or so, as these contracts are dollar-denominated, minimising the risk of currency fluctuations affecting the returns. A foreign investor gets his money back in dollars in redeeming his investment losses if the rupee depreciates in the interim. The proposal in the 2012-13 Budget to tax foreign institutional investors (FIIs) which route a larger chunk of their flows into India through countries such as Mauritius also resulted in a shift in volumes to Singapore.

Currently, Nifty futures volumes on the SGX are a little over half those on the NSE and a third of their combined volumes. The average daily volume on the SGX was Rs 3,772 crore in February, compared to Rs 6,881 crore on the NSE. In February 2012, Nifty futures volumes on the SGX were 28 per cent of the contract's volumes on the NSE.

"The export of derivatives volume to SGX was not only due to STT. There are other factors, including dollar-denominated contracts and lesser regulations on SGX, which attract investors to that market," said Yogesh Radke, head of quantitative research at Edelweiss Financial Securities. "So, a few basis points reduction in STT might not help in bringing the volumes back or even preventing further export of futures volumes."

Vineet Bhatnagar, managing director at PhillipCapital (India), also says the impact on SGX volume could be minimal.

Finance Minister P Chidambaram, in a speech in February, had stated his intention to try and bring back the trading volumes of Indian derivatives to Indian shores. He's now proposed a cut in STT on equity futures from the present Rs 17 on each Rs 1 lakh of trade to Rs 10. However, brokers note Singapore has no transaction tax at all.

"This is only one of the elements that make SGX an attractive destination. There are other factors such as position limits, the ability to trade multiple markets through a single brokerage account and no FII requirement, which should continue to be attractive to select clients," he said.