Indian stock exchanges have alarmed investors by seeking to clamp down on the offshore trading of derivatives tied to the country’s equity markets, in a move that risks disrupting bourses around the world.
Three of India’s largest trading venues announced late on Friday night that they would stop supplying data on the country’s stock prices and indices to exchanges outside India because of concern that trading was migrating beyond its borders.
The unexpected move sent shares in the Singapore Exchange, the main international venue for trading Indian equity futures, sliding 7.4 per cent on Monday.
Medha Samant, an investment director at Fidelity International, said the measure would probably “have an impact on some of the new money coming into India”, making it harder for new investors seeking to add Indian stocks to their portfolio.
FIA, the futures industry’s main trade association, warned the move would disrupt on multiple exchanges. One person in the industry, who did not wish to be named, said there were about 10 exchanges affected, including Chicago’s CME, as well as a string of index providers.
In a joint statement the three Indian exchanges — the National Stock Exchange of India, the Bombay Stock Exchange and the Metropolitan Stock Exchange of India — said derivatives trading using Indian stock market data had “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 Indian stock market has been one of the best performers over the past year, with the benchmark Nifty 50 rising 20 per cent.
Responding to speculation that the exchanges’ decision was made on government orders, Vikram Limaye, chief executive of the National Stock Exchange, India’s largest exchange by trading volume, said that concern over the volume of trading moving offshore “has existed in various quarters — not just the government and the regulators, but also the exchanges and participants in the markets”.
He added that investors were now able to invest in dollar-denominated Indian index derivatives through a new deregulated financial centre in prime minister Narendra Modi’s home state of Gujarat, where they were offered tax breaks and light registration requirements.
The move by the exchanges came days after SGX launched single stock futures that track the performance of India’s largest companies. SGX has also offered Nifty 50 index futures since 2000, which are used globally to gain offshore exposure to the Indian equity market by tracking the National Stock Exchange’s main index. Most of the Indian single stock futures business trades at the NSE.
The action followed India’s annual budget this month, which unveiled plans to reintroduce long-term capital gains tax on equity investments — a move that some analysts predicted would hasten the migration of trading to foreign markets.
The Singapore exchange said it would “take all measures to maintain orderly trading and clearing of SGX India equity derivatives for our international clients”, and would over the next several months “develop viable solutions”.
SGX added that its licence agreement with NSE “will ensure the continuity of listing and trading” of its Nifty derivatives until at least August this year.
The measures particularly hit SGX, where futures have become a popular way for overseas investors to trade the market because they are dollar-denominated and subject to lower taxes. In the last financial year to June 30 the exchange traded more than 20m Nifty 50 contracts.
Get alerts on Derivatives when a new story is published