GIFT is Prime Minister Narendra Modi’s pet project, his “gift" to Gujarat that aims to relocate some of Mumbai’s financial sector activity to Gandhinagar.
This is straight out of a romantic paperback: boy meets girl, gets infatuated, hooks up, splits and then reconciles. The 18-year love saga between India’s National Stock Exchange (NSE) and Singapore Exchange (SGX) traces a similar trajectory. Yet, this seemingly linear narrative hides mysterious, behind-the-scenes influences that have forced multiple twists and turns in the story.
The NSE-SGX romance turned rancorous around January 2017, winding its way through various legal processes. The two protagonists, surprisingly, ended their acrimonious 18-month spat in August 2019 with an arrangement to jointly launch trading of derivatives based on the stock index Nifty 50 and its stock constituents at the Gujarat International Finance Tec-City (GIFT), through a platform called the NSE International Financial Service Centre (IFSC)-SGX Connect. And, just like that, the two exchanges were back together once again.
GIFT is Prime Minister Narendra Modi’s pet project, his “gift" to Gujarat that aims to relocate some of Mumbai’s financial sector activity to Gandhinagar. The project concept was first proposed in June 2007, and it was officially inaugurated by Modi in 2013 when he was Gujarat chief minister. Since then, a number of Indian institutions have moved in, and Modi even inaugurated an international exchange in January 2017 as India’s Prime Minister. GIFT has been designed as a global financial and IT hub, offering, among other things, offshore banking, capital markets, offshore insurance and offshore asset management.
GIFT has not delivered the volumes and there is scepticism whether it will do so now. According to Sebastian Morris, professor of economics and public systems at IIM Ahmedabad: “GIFT is near Ahmedabad which is not India’s primate city. Exchanges are driven by the most primate city in a business sense. Mumbai is the only one with any potential. Even Calcutta and the regional exchanges had to give way with e-trading. GIFT has a design error. It should give up focusing on being India’s financial centre and instead become India’s back office location, perhaps with a focus on finance."
And yet, somewhere or somehow, GIFT became a player in the sudden rapprochement between NSE and SGX. But to understand the anatomy of the on-off-on relationship, it might be necessary to cast back a bit. Actually, cut to year 2000.
The love angle
As the first decade of India’s economic and financial reforms was coming to an end, India’s economic planners decided to step up efforts to attract foreign investors. Thus was born an agreement between NSE and SGX which allowed foreign investors to take a punt on India’s market, in dollar-denominated lot sizes, without being subject to India’s systemic risks or regulatory vagaries.
SGX website provides the following product information: “The SGX Nifty Futures and Options Contracts (Nifty contracts) offer global investors a cost-efficient way to gain broad exposure to the performance of the India equity market. Denominated in US dollars, the Nifty contracts are widely traded by market participants during the Asia, Europe and US hours. In particular, the SGX Nifty futures contract is CFTC (US Commodity Futures Trading Commission, the derivatives market regulator) approved, providing another risk management and access tool for US investors to manage their India equity portfolio."
Importantly, the SGX Nifty futures attracted portfolio investors who wanted to get a flavour of India without getting their hands dirty or wanted an offshore opportunity to hedge positions taken in Indian markets. In addition, SGX became a popular destination because of its lower trading costs, lower tax rates, simpler tax code and high liquidity. This turned out to be prescient because, as the India’s gross domestic product (GDP) growth rate attracted global attention, investors started pouring into Indian markets, showing up in the heady growth of stock market indices. This further fuelled international investor interest, setting off huge growth in SGX Nifty volumes.
Nifty futures have been a champion among exchange-traded products globally and soon climbed up the league tables of the world’s most traded derivatives. At this stage, envy enters the fabled love story: SGX started running away with higher volumes, leaving NSE watching forlornly.
By 2016, NSE had started believing that cons of the SGX licensing arrangement were outweighing the pros. NSE was losing a major source of revenue and liquidity, along with ancillary business. India also faced criticism that it was no longer a price-setter even for local securities and products, and that the market relied largely on foreign investors.
The criticism became sharper as market volatility spiked, especially after 2013 taper tantrum when foreign investors rushed to liquidate emerging market assets. Disapproval also emerged about larger volumes of offshore derivatives driving the local markets, leading to distortions. The offshore derivatives markets started having an overwhelming influence on the local spot markets; somewhat like the tail wagging the dog, if you will.
Broader political changes may have also played a role in the NSE-SGX tiff. The Bharatiya Janata Party came to power in May 2014. As part of the political churn, institutional boards—including NSE’s—got reconfigured with new directors, believed to be ideologically close to the ruling party.As if by cue, reports started emerging about differences between newly elected NSE board members and NSE’s two senior-most managers—vice chairman Ravi Narain and managing director Chitra Ramkrishna—both of whom had helped build NSE from scratch and were also instrumental in creating index products as independent revenue streams, which included signing the SGX contract. Charges and counter-charges about mismanagement flew thick and fast, leading finally to both exiting NSE amid a flurry of legal and regulatory processes.
Around the same time, some expert sentiments were expressed about India exporting its domestic capital markets without commensurate revenue earnings. The idea of creating a foreign jurisdiction in India to get foreign investors to trade directly and reduce the revenue leakage was revived.
This had to be gift
On 9 January 2017, Prime Minister Narendra Modi launched the first international exchange at GIFT. “My vision is that in 10 years from now, GIFT City should become the price-setter for at least a few of the largest traded instruments in the world, whether in commodities, currencies, equities, interest rates or any other financial instrument," said Modi.
Also, by this time, volumes had curiously started dropping on NSE. In July 2017, Indian market regulator Securities and Exchange Board of India (Sebi) tightened know-your-customer rules for clients of foreign portfolio investors. Singapore became the destination of choice, further adding to traded volumes and turnover. In the midst of all this, in January 2018, SGX announced its intention to launch individual stock futures, based on the Nifty 50 constituents. India was anyway concerned over SGX’s growing market share in Nifty futures, which had expanded to 52% at last count. The launch of single stock futures was what broke the proverbial camel’s back.
“SGX’s products were primarily infringing on copyrighted work," said an NSE official. “No one has used the entire index’s settlement price. If that continues to happen, there would be no sanctity for copyrighted work or IP rights," he added. The retaliatory move came on 10 February 2018. Through a joint press release issued with other stock exchanges, NSE decided to stop providing data feed services to all foreign exchanges, including SGX. This disallowed foreign investors trading in Singapore from accessing NSE’s real-time data, thereby slowing down their ability to take positions on SGX.
No one knew how the decision would be enforced, and SGX had to deal with numerous angry clients. Foreign investors and global index provider MSCI felt that the focus should be on making trading in India more attractive rather than banning foreign bourses. Two months later, in April, SGX communicated to its clients that it will continue to offer trading in Nifty futures and options, but only by a different name. The new product would have been called India Futures and India Options, and SGX would use Nifty’s closing price to settle its new contracts.
“NSE was on the table but SGX decided to launch products exactly like Nifty. How could NSE let that slide," said another person who was directly involved in the negotiations between the exchanges.
The legal wrangles
The relationship, already headed south, spilled over to the courts. In May 2018, NSE sued SGX for copyright infringement. India Index Services and Products Ltd (IISL), an NSE subsidiary, filed a petition against SGX’s subsidiary Singapore Exchange Derivatives Trading Ltd in Bombay high court, which directed SGX to refrain from launching any new derivatives contracts.
On 29 May 2018, Bombay high court asked the exchanges to settle their differences through arbitration. Retired judge S.J. Vazifdar was appointed as an arbitrator, and SGX decided not to launch the disputed product during the pendency of arbitration. On 18 June 2018, the arbitrator, after hearing the two parties, asked the two parties to resolve their differences. While doing so, the arbitrator allowed SGX to continue listing and trading of SGX Nifty contracts beyond the August deadline (set by NSE in its 10 February notice terminating the licence agreement with SGX) but only till the final arbitration award.
Enter gift again
On 24 July 2018, Sebi said its officials met with the Monetary Authority of Singapore (MSA) to discuss an amicable resolution to the NSE-SGX issue. “Both regulators also agreed that NSE and SGX would carry out necessary discussions to come up with a solution that is acceptable to both parties," a Sebi statement said.
A day after that, arbitration proceedings were deferred, while SGX and NSE jointly issued a release, stating that the two exchanges had resumed discussions for a potential collaboration in GIFT IFSC. “SGX and NSE will jointly engage and consult relevant stakeholders on the proposed collaboration. Pending the outcome of the discussions, the learned arbitrator has granted a deferment of the arbitration proceedings between SGX and IISL, NSE’s index company," said the joint statement.
In February this year, NSE and SGX engaged in serious talks to launch Nifty index derivatives in GIFT, while the court deferred the arbitration deadline till 31 December 2020. On 6 August 2019, the two exchanges jointly announced receiving regulatory approvals for GIFT-Connect which would be launched by late next year. While the details of financial arrangements, operational and implementation issues are still not public, GIFT-Connect appears to have taken care of SGX’s primary concern.
“This deal makes sense. Where the order gets executed is not as important commercially as where it clears; SGX gets to keep its order flow and receive the clearing fees and deliver concomitant benefits of margin offsets to its customers. There is more profit in clearing than trading futures, so SGX ought to find the deal a satisfactory compromise," said Patrick L. Young, chief executive of crowd-funding platform Hanza Trade.
But the mystery lingers. What could have brought about the entente? One theory has it that regulators intervened because the squabble was a concern for international investors. “Sebi had asked NSE to work with SGX for an amicable solution and avoid a long legal battle. This was dampening investor confidence particularly foreign investors. MSCI was already mulling on reducing India weightage in emerging market index," said a Sebi official who did not wish to be named.
Even the MAS issued a statement that the row was disruptive for global institutional investors in Indian equities. “A prolonged dispute will impact the accessibility of the Indian equities market to international investors," an MAS spokesperson said in a statement on 30 May.
The other theory is the temporary separation was forced to make SGX agree to shift to GIFT, which had problems attracting trades and volumes. The challenge, though, remains: getting investors interested in trading there.