The move is meant to curb or reverse the export of India’s financial markets to overseas trading platforms.
Indian exchanges have in a drastic move terminated licensing agreements for use of their indices and data feeds with their foreign counterparts.
The move is meant to curb or reverse the export of India’s financial markets to overseas trading platforms, such as the Singapore Exchange (SGX) and the Dubai Gold & Commodities Exlow-change.
“The existing agreements for licensing indices and prices of Indian securities for trading derivatives on foreign exchanges or trading platforms shall be terminated with immediate effect, subject to the notice period mentioned in the respective licensing agreement,” said the National Stock Exchange (NSE), BSE and Metropolitan Stock Exchange (MSE) in a rare joint press release.
The combined volumes of Nifty futures, the most-traded domestic equity derivatives contract, in the overseas market are more than those on the NSE, which licences the index. This shift was expected to accelerate with the introduction of single-stock futures of domestic stocks on the SGX.
There is a large amount of outstanding contracts of the Nifty and other Indian securities in the overseas market. The announcement, however, may not lead to any knee-jerk unwinding since the notice period for termination is up to six months, according to an official.
Sources said the export of domestic financial markets to overseas platforms had been cause for concern for the government as well as the Securities and Exchange Board of India and the latest move was meant to assuage their fears.
“We are trying to consolidate liquidity in the market. There are enough avenues available in India for investors who trade in domestic stocks and indices on overseas platforms,” said Vikram Limaye, managing director and chief executive officer, NSE. “It will impact our revenues but it will not be materially high,” he added.
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 do not want to register with local authorities, has provided more impetus on these platforms. Higher volumes overseas pinch the government as these dent tax collection and affect liquidity and better price discovery.
“The move will see a substantial surge in revenue collection for the government. This will address concerns over liquidity moving to overseas markets,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services.
‘For various reasons, the volumes in derivatives trading based on Indian securities, including indices, have reached large proportions in some 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.
Domestic exchanges will no longer license their indices, such as Nifty or Sensex, for launch of offshore derivatives contracts. The exchanges have also restricted the use of market data feeds to avoid creation of products for derivatives trading based on domestic stocks in overseas markets.
“To ensure the move impacts flows into domestic markets, we will continue to license our products to exchange-traded funds (ETFs) that bring money into India,” Limaye said.
Photograph: Sahil Salvi.