COMMENT: Idea behind international bourse is good, but challenges galore
International exchange can take Indian financial sector to a different level provided government laws are consistent and in line with global norms
India has taken a step ahead in getting integrated with global financial markets with the launch of India International Exchange (INX) in Gandhinagar, Gujarat. As a wholly owned subsidiary of Bombay Stock Exchange (BSE) the exchange will initially allow trading in equity derivatives, currency derivatives, commodity derivatives to start.
Set up in Gujarat International Financial Tech City (GIFT), the exchange offers a host of tax incentives to attract traders and institutions. As compared to Indian bourses, INX offers no Security Transaction Tax (STT), no Commodity Transaction Tax (CTT), no stamp duty, no service tax, no long-term capital gains, no dividend distribution tax and no income tax for the first five years. Before you decide to close your domestic broking account and move to INX, there is one more ‘No’ in the list. It says No to Indians as government fears that the exchange can be used for money laundering.
Being an international exchange set up in a SEZ (special economic zone), trading in INX is dollar denominated. The idea behind setting up an exchange is to capitalise on the time zone gap between international markets like Hong Kong/Singapore on the East and Europe on the west. Though Dubai also has an international exchange, it has not really picked up.
International stock exchanges are needed to exploit the 24X7 development taking place globally. Currencies, commodities and bonds are traded round the clock, so are some of the most active stocks. Though the main trading still takes place in USA, spill-overs happen in Europe, Australia, Japan, Hong Kong and Singapore.
A client is registered with a broker who is a member of all the important stock exchanges, thus allowing him access to markets across the globe. He can buy and sell in any market which is open. Thus if a client is in the US and there is an early morning OPEC meeting in Middle East, the trader can react to the news flow by trading in any Asian markets which would be open when the meeting is on.
India fits in beautifully to exploit the time zone gap between Hong Kong/Singapore and Europe that are separated by 8 hours while India is around five hours from Europe. India thus offers continuity in trading in all important exchanges. INX official’s hopes to capture market share from Singapore and Hong Kong based on its location and facilities offered. INX is being touted as one of the fastest exchanges, if not the fastest exchange in the world and can thus attract programme trading volume.
Being set up in a SEZ – GIFT City, INX members will not be subjected to the same tax laws as other FIIs who trade on Indian bourses. But India’s image among FIIs have taken a hit especially after the previous government imposed retrospective tax, and the present government is still trying to figure out a way to handle it.
It needs to be remembered that FIIs would like a consistent tax regime. India is competing with other countries for FII business and thus has to align itself with what is being offered globally and in fact need to better it to incentivise them to start trading in India.
Further, unlike stocks and instruments that are traded on Indian bourses, the ones traded on INX might not have anything to do with India. For example, if Walmart is traded on INX, it may not have any assets in India. The point is it would only take a small provocation for these assets to stop trading in India. Government will have to isolate the exchange from political interference and maintain a steady policy.
If the exchange is successful, it would offer an opportunity for Indian companies to raise large capital from international investors. Ashish Chauhan, CEO and managing director BSE, says the exchange can be to India what Hong Kong is to China. Large amount of capital can be raised from the exchange at much lower cost and lesser time.
One big negative for INX is that NSE is also planning to set up a global exchange in the same area. NSE has a lion’s share of domestic trading, it could impact INX global plan as most foreign brokers prefer trading on NSE rather than BSE.