What is the issue?
- Structural problems within India’s stock exchanges are causing trading in Indian derivatives to move offshore.
- But rather than addressing them, BSE, NSE and MSE recently announced stopping data feed regarding Indian stocks and indices to overseas exchanges.
What are the aspects that drove the move?
- While foreign exchanges seem to be doing better at attracting new clients, India’s stock exchanges aren’t willing to compete.
- Instead, they’ve resorted to protectionism to guard the home turf against foreign exchanges by resorting to data feed disruption.
- They’ve spelt out their intention to not renew existing agreement with foreign exchanges regarding data-sharing, most of which will expire in 6 months
- The reason stated is that offshore derivatives could be causing “migration of liquidity from India, which is not in the best interest of Indian markets”.
- But in reality, higher volumes of Indian derivatives are trading in the offshore market than in domestic bourses, which has spooked Indian exchanges.
- This crackdown on offshore derivatives market is hence more to boost the businesses of Indian exchanges than anything else.
- This move is also expected to benefit ambitious endeavours such as the “International Financial Services Centre” in Gujarat.
What are the structural issues in the Indian stock market?
- Index derivatives such as the SGX Nifty that is linked to stocks that form Nifty, have gained the patronage of large foreign investors for many reasons.
- These instruments are traded for longer hours in offshore exchanges, including hours when Indian exchanges are closed for business.
- Contrarily, the proposal to extend trading hours by Indian stock markets has failed to take off.
- Also, places like Singapore and Dubai, are low-tax jurisdictions that offer investors the chance to lower their transaction costs.
- In India, in contrast, the securities transaction tax and the capital gains tax discourage foreign investment in financial assets.
- All of these make the foreign exchanges more investor-friendly, and the fact that offshore derivatives are denominated in dollars adds to their allure.
What are the challenges?
- Sustainability - Foreign bourses will find other ways to list derivatives linked to Indian stocks and indices without any help from Indian exchanges soon.
- The present move, thus, is unlikely to rein in the vast offshore market for Indian derivatives.
- Addressing Demand - Singapore Exchange Limited (SGX) had recently decided to introduce futures on individual stocks that are part of Nifty.
- Incidentally, the SGX’s decision to introduce futures was spurred by the SEBI’s decision last year to restrict foreign investment in domestic futures.
- While the current protectionism can be seen as a counter to this, it needs to be recognized that offshore markets are simply catering to the unmet demand.
- Way Forward - India’s policymakers should hence address the structural problems that have caused trading in Indian derivatives to move offshore.
- This would be a far better response than any knee-jerk response favouring domestic exchanges and also boost trading volumes and businesses.
Source: The Hindu
