Will stop licensing indices to foreign players lift govt revenue collection?
The move is likely to see a substantial surge in the revenue collection for the government
Ever since Indian exchanges terminated licensing agreements for use of their indices and data feeds with their foreign counterparts, overseas players are trying to convince the Indian regulators and the government that the move will reduce options before foreign investors.
Motilal Oswal, Chairman and Managing Director of Motilal Oswal Financial Services, said the move will see a substantial surge in the revenue collection for the government, addressing the concerns over liquidity moving to overseas markets.
Indian exchanges say 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 migration of liquidity from India, which is not in the best interest of Indian markets.
Vikram Limaye, MD & CEO of NSE, earlier said the exchange was trying to consolidate liquidity in the market and there are enough avenues available in India for investors who currently trade in domestic stocks and indices on overseas platforms.
Limaye said it will impact the exchange's revenues but it won’t be materially high.
The combined volumes of Nifty futures — the most-traded domestic equity derivatives contract—in the overseas market are more than the NSE.
It is also expected to accelerate further with the introduction of single stock futures of domestic stocks on the SGX.
Major Indian exchanges said earlier in a joint statement that the move was to curb the export of India’s financial markets to overseas trading platforms such as Singapore Exchange (SGX) and Dubai Gold & Commodities Exchange.
The announcement, however, is not likely to lead any knee-jerk impact since notice period for the termination is up to six months. Currently, there is a huge amount of outstanding contracts of Nifty and other Indian securities in the overseas market.
The export of domestic financial markets to overseas platforms have been a concern for the market regulator Sebi as well as the government and the latest move is to assuage their fears.
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, tightening of participatory notes (P-notes) norms, used by investors who don’t want to register with local authorities, has given more impetus to these platforms.
The exchanges had restricted use of market data feeds to avoid creation of derivatives products trading based on domestic stocks in the overseas markets.
However, the exchanges will continue to license their products to exchange-traded funds (ETFs) that bring money into India.
The measures taken by the exchanges will definitely curb trading of domestic securities in the offshore market, but it might not help volumes shift back to India as a lot of investors prefer Singapore and Dubai because cost of trading in these countries is lower than India.
Countries like Singapore and Dubai don’t impose tax on short-term or long-term gains, besides offering long trading hours of up to 22 hours.
Global index provider MSCI in a statement said it was evaluating the potential impact on existing financial products and the future accessibility of the Indian equity market for international institutional investors.
"We believe that if the changes are put into effect, the result will be disruptive and harmful to international institutional investors in Indian equities whether accessing the market onshore or offshore," MSCI said in a statement.
However, Rajat Sharma of Sana Securities said the move will not make much difference in terms volume in the Indian equity market.