Currently, there is a huge amount of outstanding contracts of Nifty and other Indian securities in the overseas market. The announcement, however, may not lead to any knee-jerk unwinding since notice period for the termination is up to six months, said an exchange official.
Sources said the export of domestic financial markets
to overseas platforms have been a concern for the government as well as the market regulator Sebi and the latest move is to assuage their fears.
“We are trying to consolidate liquidity in the market. There are enough avenues available in India for investors who currently trade in domestic stocks and indices on overseas platforms,” said Vikram Limaye, MD & CEO, NSE. “It will impact our revenues but it won’t be materially high.”
Most overseas investors prefer trading in locations like Singapore and Dubai due to their low-cost structure unlike India, where trades attract securities transaction tax and capital gains tax too.
Also, significant tightening of vehicles such as participatory notes (P-notes)—used by investors who don’t want to register with local authorities—has given more impetus on these platforms.
Higher volumes overseas pinch the government as it makes a dent in tax collection, impacts liquidity and better price discovery. “The move will see a substantial surge in the revenue collection for government. This would address the concerns over liquidity moving to overseas markets,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.
“It is observed that for various reasons the volumes in derivative trading based on Indian securities including indices have reached large proportions in some of the foreign jurisdictions, resulting in migration of liquidity from India, which is not in the best interest of Indian markets,” the press statement by the exchanges said.
Going ahead, domestic exchanges will not license their indices, such as Nifty or Sensex, for the launch of offshore derivatives contracts on them. The exchanges have also restricted use of market data feeds to avoid creation of products for derivatives trading based on domestic stocks in the overseas markets.
“To ensure the move impact flows into domestic markets, we will continue to license our products to exchange-traded funds (ETFs) that bring money into India,” said Limaye.
Earlier this week, the SGX launched trading in single-stock futures based on domestic stocks even after Indian regulatory authorities nudging the exchange not to go ahead with the move. Restricting use of real-time data feeds on prices is aimed at ensuring the launch isn’t a success.
Market players said the move by domestic exchanges would only be a partial success.
“The severe measures announced by the exchanges will definitely curb trading of domestic securities in the offshore market. However, it doesn’t mean the volumes will shift back to India. A lot of investors preferred Singapore and Dubai as the costs for trading in these markets was very low compared to India,” said a broker asking not to be identified.
Unlike India, Singapore and Dubai don’t impose tax on short-term or long-term gains. Also, these platforms don’t have securities transaction tax (STT). Moreover, they offer long trading hours of up to 22 hours.
Meanwhile, India has tried to create its own international financial services centre (IFSC) at Gift City in Gujarat. The platform has not yet been able to attract any significant investors or volumes as trading costs –though lowers compared to the onshore market-- still remain high compared to other overseas markets. Also, the regulatory framework remains restrictive, say experts.