The move has been triggered by Securities and Exchange Board of India’s (Sebi’s) decision to ban participatory notes (p-notes) from investing in Indian single-stock futures except for the purpose of hedging. The decision was taken in order to curb speculative trading, leading to volatility in the markets.
After the Sebi’s diktat, direct registration has become mandatory for any overseas fund to trade in Indian single-stock futures. However, the current rules don’t permit any US hedge fund to invest in futures other than those approved by Commodity Futures Trading Commission (CFTC). These funds used to take the p-notes route to trade in Indian single-stock futures, as this doesn’t amount to direct exposure.
“After the Sebi circular, a lot of US-based funds withdrew from the Indian derivatives markets.
Since the door for indirect participation is closed now, SGX’s launch will attract a good number of investors. Apart from being CFTC recognised, SGX offers several other advantages to investors in terms of cost and convenience. Hence, the launch could threaten the business of Indian stock exchanges,” said a source.
Another key disadvantage for Indian bourses over the SGX would be the operational hours. The Indian derivatives markets
operate in tandem with the cash markets. But, investors can trade SGX futures round-the-clock. This is an advantage for the investors, especially in the western hemisphere, who find it difficult to trade according to Indian trading hours.
Currently, a lot of foreign investors use global platforms such as the SGX and the Chicago Mercantile Exchange (CME) — which offer almost round-the-clock trading on some Indian contracts — for trading or hedging their underlying exposure to Indian stocks.
Cost effectiveness would be another key advantage for the SGX, as it doesn’t impose securities transaction tax (STT) and stamp duty, which are levied by India. Also, they have far more friendly accessibility norms for overseas investors.
An official email sent to the NSE seeking its response remained unanswered. Responding to the email query, the SGX said “We are continuously in dialogue with market participants to assess the demand for risk management products. As a highly liquid, offshore risk management centre, SGX remains committed to complementing the primary domestic market for hedging of Indian equity exposures.”
The SGX is already a key destination for Indian futures among overseas investors. The Singapore-based exchange, which had launched Nifty index contracts on its platform in collaboration with the NSE, now accounts for half of the volumes in the SGX Nifty. Investors can also trade from the SGX without having a broker or terminal in the exchange.