Indian retail traders have no reason to celebrate SGX Nifty trading in India

Trading

Highlights

• SGX Nifty will be fully traded at NSE‘s IFSC-SGX Connect from July 3, 2023
• All US dollar-denominated Nifty derivatives contracts will be exclusively traded on NSE IFSC post-transition
• The move should give a big boost to trading in GIFT City
• However, there is nothing in it for Indian traders as they are not allowed to trade in derivative instruments in foreign currencies

After years of struggle, India’s attempt to become an international financial trading hub will receive a significant boost. July 3, 2023 will be a red letter day for Indian markets. The Singapore Exchange (SGX) on Monday issued a circular stating that a full-fledged liquidity switch will be made effective from July 3, 2023, from SGX to the NSE‘s IFSC-SGX Connect. Following the transition, all US dollar-denominated Nifty derivatives contracts will be exclusively traded on the NSE IFSC.

A compromise between SGX and NSE made it possible for SGX Nifty to come to India. At its peak, SGX Nifty accounted for nearly 10 percent of the volume on SGX.

Even today SGX Nifty is preferred over the NSE-traded Nifty. Open interest in the April futures contract on the NSE stands at 182,627 contracts while that on the SGX is 231,467 contracts.

Lower margin, no taxation, trading in dollar currency with no hedging cost, and a low cost of trading has made the SGX Nifty popular among foreign traders.

Shifting the instrument to India is unlikely to change much as all the costs and facilities extended to traders in Singapore will remain the same in GIFT City.

However, while global traders will continue to reap the benefit, Indian traders will have to watch and salivate at a lost opportunity. This is because resident Indians are not allowed to trade in derivative instruments in global markets.  However, proprietary traders, if they open an account with a broker can trade in SGX Nifty.

Since proprietary and pseudo-proprietary traders account for a substantial trading volume one cannot rule out a shift from NSE Nifty futures to SGX Nifty. All the product listed on NSE IFSC offers the following tax benefits No Capital Gains Tax, No Security Transaction Tax (STT), No GST, and No Stamp Duty. These benefits combined with that of lower margins are reasons enough for traders to shift to SGX Nifty.

Dharmesh Khandelwal, Vice President, Indira Securities feels that the trading volume of proprietary traders, especially in Nifty futures can shift to SGX Nifty given the huge tax benefit and lower cost of operations. For example for a proprietary trader who hedges his position through Nifty, he has to pay a 30 percent short-term capital gains tax in India but this alone is waived if his position is moved to SGX Nifty.

A resident retail Indian can avail the benefit of the Liberalised Remittance Scheme (LRS) and ‘invest’ $250,000 a year in stocks traded in any exchanges but not trade in them. This amount also includes all travel and hotel expenses that a person makes to a foreign country during the year.

In short, bringing the SGX Nifty to India does not help retail Indian traders. Over the years Indian traders have been migrating or taking NRI status in other countries, mainly Dubai, Singapore, and Mauritius to avoid the high-cost structure of trading in India. Smaller traders and those who trade on a part-time basis have little option but to stay in India and struggle to be profitable after incurring all the costs associated with trading.

Besides the short-term and long-term capital gains taxes, other operational taxes like the transaction tax, exchange taxes, and others have made India one of the costliest markets to trade in. Despite this the NSE is the biggest derivative exchange in the world.

If the same benefit that the government extends to foreign players is extended to Indian traders, volume in exchanges will shoot up and we would not have needed a GIFT City. This would attract more money as one of the biggest criteria for bigger funds to enter a market is the ease of entering and exiting a market. Higher liquidity will ensure that bigger funds and pension funds would enter Indian markets.

Bringing in the SGX Nifty and allowing brokers to open offices in GIFT City will serve little purpose for a retail Indian trader.