Can BSE and NSE bring home the bounty?
, ET Online|
Updated: Feb 28, 2018, 08.23 AM IST
What happened? Leading Indian stock exchanges -- NSE and BSE -- recently decided to discontinue index-licensing agreements and live data feeds with their foreign counterparts. The move came on the back of news that Singapore's SGX is planning to introduce individual stock futures on stocks from the Nifty 50 index. Ok. But why are the Indian bourses doing this? Money, obviously. Ask Vikram Limaye, CEO of NSE, and he will tell you, "Trading happens to be the biggest source of revenues for stock exchanges." Revenues through trading account for 50 per cent of the total revenues of NSE, while it is 75 per cent for SGX. The SGX Nifty futures volumes are significant, and now NSE would like to have the bounty back into India. That's smart. Right? The answer to that lies in the nature of the funds that chose to trade on SGX rather than come to Ind...
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What happened?
Leading Indian stock exchanges -- NSE and BSE -- recently decided to discontinue index-licensing agreements and live data feeds with their foreign counterparts. The move came on the back of news that Singapore's SGX is planning to introduce individual stock futures on stocks from the Nifty 50 index.
Ok. But why are the Indian bourses doing this? Money, obviously. Ask Vikram Limaye, CEO of NSE, and he will tell you, "Trading happens to be the biggest source of revenues for stock exchanges."
Revenues through trading account for 50 per cent of the total revenues of NSE, while it is 75 per cent for SGX.
The SGX Nifty futures volumes are significant, and now NSE would like to have the bounty back into India.
That's smart. Right? The answer to that lies in the nature of the funds that chose to trade on SGX rather than come to India.
These are mainly arbitrage or hedge funds and long-only funds. Arbitrage and hedge funds provide liquidity to thin financial markets where mis-priced financial instruments are found. This reduces volatility.
"The Indian stock market is too tiny to matter to large global investors. The entire market cap is similar to that of Taiwan, whose GDP is one-fifth of that of India. Only a part of the volume will come back to India. Foreigners trade on SGX because of tax arbitrage. You grow by expanding, not by downsizing. The move reduces the overall volume, hence would increase the volatility due to a shallow market and lack of pre-Indian market and post-Indian market price discovery." That's Sanjay Guglani, CIO, Silverdale Funds, a fund house operating out of Singapore.
There are around 1,800 companies listed on NSE. The investible companies are closer to the top 500 companies in market cap. "More than three-fourths of foreign portfolio investments are part of global funds and not India-dedicated funds," Guglani says.
So this could backfire? By nature, arbitrage and hedge funds look at short-term trading (that's how they increase liquidity and pricing anomalies). They work on daily yields, and given the slim returns, they need to be in tax-efficient locations.
Singapore has low broking fees that start from 0.18 per cent and fall according to the size of the trade. There are no other taxes on trading. In India, trading costs include 0.35 per cent broking fees which fall with the trade size. In addition, there is a securities transaction tax (0.1 per cent) and now a long-term capital gains tax of 10 per cent.
"India is among the few strange countries that require foreigners to become Indian tax and law experts before they invest into listed securities; and then file tax returns and other filings. Besides, Indian regulators change regulations without consulting the industry," Guglani says.
In the past few years, some large global fund houses -- Fidelity, Morgan Stanley, Goldman Sachs, JP Morgan, Alliance Capital, Standard Chartered, Daiwa, Deutsche -- have exited India. The new move may worsen the situation because investors who want limited exposure to India may find the whole deal unattractive.
Is the India story under threat? Not quite. Remember we told you there are also long-only funds that trade in SGX Nifty futures? These funds are expected to move to India once the SGX Nifty is discontinued, as the cost of trading, which normally affects short-term investors, is not a cause for concern for them.
There's more. The move could be a big gift for NSE in particular.
How's that? India has been making efforts to market the Gujarat International Finance Tec-City (GIFT) where NSE IFSC, the global exchange promoted by the NSE, will be operational for a longer period. The SGX is talking to NSE IFSC to create a link to get the trading volume that it has lost.
"It is early days, but we expect this move will work and bring volumes in Indian indices at offshore locations back into India," says Devarsh Vakil, head - advisory (private client group), HDFC Securities. "GIFT City is a key beneficiary," he adds.
Ok. But why are the Indian bourses doing this? Money, obviously. Ask Vikram Limaye, CEO of NSE, and he will tell you, "Trading happens to be the biggest source of revenues for stock exchanges."
Revenues through trading account for 50 per cent of the total revenues of NSE, while it is 75 per cent for SGX.
The SGX Nifty futures volumes are significant, and now NSE would like to have the bounty back into India.
That's smart. Right? The answer to that lies in the nature of the funds that chose to trade on SGX rather than come to India.
These are mainly arbitrage or hedge funds and long-only funds. Arbitrage and hedge funds provide liquidity to thin financial markets where mis-priced financial instruments are found. This reduces volatility.
"The Indian stock market is too tiny to matter to large global investors. The entire market cap is similar to that of Taiwan, whose GDP is one-fifth of that of India. Only a part of the volume will come back to India. Foreigners trade on SGX because of tax arbitrage. You grow by expanding, not by downsizing. The move reduces the overall volume, hence would increase the volatility due to a shallow market and lack of pre-Indian market and post-Indian market price discovery." That's Sanjay Guglani, CIO, Silverdale Funds, a fund house operating out of Singapore.
There are around 1,800 companies listed on NSE. The investible companies are closer to the top 500 companies in market cap. "More than three-fourths of foreign portfolio investments are part of global funds and not India-dedicated funds," Guglani says.
So this could backfire? By nature, arbitrage and hedge funds look at short-term trading (that's how they increase liquidity and pricing anomalies). They work on daily yields, and given the slim returns, they need to be in tax-efficient locations.
Singapore has low broking fees that start from 0.18 per cent and fall according to the size of the trade. There are no other taxes on trading. In India, trading costs include 0.35 per cent broking fees which fall with the trade size. In addition, there is a securities transaction tax (0.1 per cent) and now a long-term capital gains tax of 10 per cent.
"India is among the few strange countries that require foreigners to become Indian tax and law experts before they invest into listed securities; and then file tax returns and other filings. Besides, Indian regulators change regulations without consulting the industry," Guglani says.
In the past few years, some large global fund houses -- Fidelity, Morgan Stanley, Goldman Sachs, JP Morgan, Alliance Capital, Standard Chartered, Daiwa, Deutsche -- have exited India. The new move may worsen the situation because investors who want limited exposure to India may find the whole deal unattractive.
Is the India story under threat? Not quite. Remember we told you there are also long-only funds that trade in SGX Nifty futures? These funds are expected to move to India once the SGX Nifty is discontinued, as the cost of trading, which normally affects short-term investors, is not a cause for concern for them.
There's more. The move could be a big gift for NSE in particular.
How's that? India has been making efforts to market the Gujarat International Finance Tec-City (GIFT) where NSE IFSC, the global exchange promoted by the NSE, will be operational for a longer period. The SGX is talking to NSE IFSC to create a link to get the trading volume that it has lost.
"It is early days, but we expect this move will work and bring volumes in Indian indices at offshore locations back into India," says Devarsh Vakil, head - advisory (private client group), HDFC Securities. "GIFT City is a key beneficiary," he adds.
