In a rare move, the two premier exchanges in India, BSE and NSE, have joined hands to end all licensing agreements with all foreign exchanges. Consequently, NSE and BSE will stop offering live prices with Singapore and Dubai exchanges, respectively. The main aim of the move is to stop Singapore Exchange (SGX) from starting stock futures.
The main aim of the move is to stop Singapore Exchange (SGX) from starting stock futures. The general perception is that the present move would make it impossible for SGX to keep offering derivatives based on India’s benchmark Nifty 50, among its flagship products.
But that is easier said than done: SGX is not going to take it lying down. But more importantly, the move highlights the insecurity of Indian exchanges. But where does the insecurity stem from? Is it the government’s move to introduce long-term capital gains (LTCG) tax?
Let’s look at the facts.
The SGX Nifty on Monday fell by nearly 8.8 percent at the start of the day, the most it did since November 2008. But there was no reflection of a similar scare in the Indian market. Indian markets opened higher and continued to move higher on Monday. In short, there was no linkage between the sentiment reflected in SGX and that on Indian bourses. This suggests that there is no arbitrage taking place between SGX and Indian markets. This is the norm. SGX Nifty is only an indicator of where Indian markets may open. More often than not these signals are wrong, if not in the direction, then in the magnitude.
Since only futures of SGX are actively traded on SGX with a monthly settlement, one can conclude that it is largely the hot money that finds its way to SGX. Traders who want to place a country bet on India prefer to go to SGX.
For such a trader SGX is a clear choice over Indian bourses for many reasons. First and foremost is the inherent cost of trading in India, where securities transaction tax (STT) coupled with various other levies is a burden. In fact, a study conducted by NSE found out that Indian exchanges are the costliest to trade in. If the trader manages to post a profit for the year he is charged with a short-term capital gains tax (STCG), thus reducing his yields. For the same trade, everything being equal a trader has a higher yield if he places his order on the SGX. Why then would such traders come to India?
Apart from the cost, SGX Nifty offers time advantage. SGX Nifty is a 16 hours market as compared to 5.30 hours for Nifty. The SGX has an inherent advantage over Indian Nifty as a trader or investors can use this market to capitalize on an overnight event. Take for example the demonetisation news that was announced late in the evening on November 8, 2016, resulting in India markets opening sharply lower the next day without any opportunity to exit. However, those with access to SGX Nifty had an opportunity to hedge their position.
Both Indian bourses knew about their disadvantages, but the final straw was SGX planning to start stock futures. This would have broken the back of NSE, especially at a time when it is planning to come out with an IPO.
As for LTCG, it had little impact as SGX Nifty is a futures contract which expires in a month; hence there is no question of LTCG being imposed on it. SGX also has three-month contracts but these too would fall under the STCG gambit.
So does the move suggest the end of SGX’s relationship with Indian markets? For SGX, the SGX Nifty accounted for nearly 4 percent of the exchange’s total revenue and 10 percent of revenue from derivative products. It is big enough to make an impact. SGX in a communique said that it is working with NSE for a solution.
Unfortunately for NSE, there is little it can do to prevent traders from using the Singapore route. As Ajay Shah, a professor at the National Institute of Public Finance and Policy, said in a blog, SGX has numerous alternatives. SGX can go to a mom-and-pop index provider who makes a Nifty-like index: an index where 49 of the 50 stocks are the same as those in Nifty.
NSE and BSE hoping that the trades that were taking place in SGX might come to them are day-dreaming. SGX can shift to the MSCI India index, and MSCI can gently move closer to the Nifty composition. If somehow, SGX is prevented from having an effective exchange-traded Nifty product, the business will just go OTC, Ajay Shah wrote in his blog.
Banning SGX from getting access to Indian price data is not going to solve the problems of Indian exchanges. The bureaucrats sitting at North Block should know that imposing numerous taxes will not only result in foreign money using other markets to tap India but also Indian finance companies going abroad.
Ironically, India is trying to attract foreign stocks and indices to be traded in India through the GIFT (Gujarat International Financial Tech) based International Financial Services Centre (IFSC). If other exchanges chose to do what the top two Indian exchanges have done to SGX, GIFT city, as the financial hub is called, would be a ghost town.