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Offshore trading in Indian indices to end in 6 months

MUMBAI: By the end of this summer, Dalal Street traders will..

MUMBAI: By the end of this summer, Dalal Street traders will no longer get Nifty rates from Singapore when they sip their morning cup of tea. The Nifty and Sensex, whose derivative contracts are traded in Singapore and Dubai, respectively, will stop the practice in the next six months as Mumbai bourses, the capital markets regulator and New Delhi are all concerned about business moving away from India's shores.

The National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange, in a joint communication, said on Friday that they would not provide market data to any foreign exchange.

'Consolidating Liquidity'

The exchanges said existing data licensing pacts with overseas bourses would be terminated immediately, subject to notice periods mentioned in the agreements.

"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 the migration of liquidity from India, which is not in the best interest of the Indian markets," the joint statement said.

NSE managing director Vikram Limaye told ET that the objective of this step is to "consolidate liquidity" in India. "There has been a concern surrounding the building up of liquidity offshore, which is not in the interest of Indian markets," he said.

Limaye said NSE will give Singapore Exchange, or SGX, six months to terminate the licensing agreement. India's largest exchange has a contract with SGX that allows futures and options on the Nifty to trade in Singapore.

"Data can be provided by Indian exchanges provided if the end use of the data is not for trading and settlement of offshore derivative contracts," Limaye said.

In the past few years, activity in Nifty futures on Singapore Exchange has exceeded that on the NSE. Foreign investors, who wish to bet on India's main stock index without registering with the Securities and Exchange Board of India (Sebi), trade on SGX Nifty futures because of cheaper costs, higher liquidity and better tax rates in the island city. For Indian traders, the SGX Nifty futures that start trading before NSE Nifty every morning act as a directional cue on foreign investor sentiment. The open interest, or outstanding positions, in SGX Nifty is 70-75% more than the total open interest in Nifty futures back home, said Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities.

GROWING CONCERN

Although the exchanges, Sebi, and the government have been concerned about the rising activity in Singapore for a while, SGX's recent proposal to launch single stock futures tracking the movements of Indian companies may have triggered Mumbai's decision to scrap the licence agreements.

"The government and Sebi have been worried about our markets being exported to other jurisdictions. Exchanges have kept Sebi in the loop about the decision," said a senior official at the regulator.

Stock futures contribute about 85% to the futures turnover on local exchanges. The launch of stock futures contracts in Singapore would have resulted in a shift in activity overseas. "This is a precautionary step… against SGX planning to trade individual stock futures as that would have created extreme volatility, and could have had an impact on volumes along with migration of liquidity," said Motilal Oswal Financial's derivatives analyst Chandan Taparia.

Analysts said once the licences are terminated, activity could shift from SGX futures to local exchanges. But the move could also put off foreign investors trading through SGX futures.

"A chunk of the activity that was happening in Singapore will shift to Indian exchanges. Volumes will go up here and volatility could reduce," said Shubham Agarwal, chief executive officer, Quantsapp, an algorithm analytics firm. "But it could also put off a lot of foreign investors who were trading only in Nifty SGX. They might lose interest in betting on India."

If foreign investors decide to trade in Nifty futures on the NSE, it would also boost their tax compliance. "If Indian instruments are traded outside, the taxation department does not have any hold on trades happening there. This is a welcome step in terms of higher compliance… and better liquidity on the screen," said Radke. "FIIs will always like to go to out-of-tax jurisdictions. Here they will have to pay taxes and comply with the law of the land."

The move could also be aimed at kick-starting activity in the recently launched Gujarat International Finance Tec (GIFT) City, the government's ambitious project.

To be sure, some market participants considered the step protectionist.

"In a way, the step by the Indian exchanges is a bit strange in today's times because worldwide, everybody is liberalising," said Quantsapp's Agarwal.

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