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Growing disconnect between SGX Nifty & D-Street telling a story

By DK Aggarwal

There was a time when morning trade on Nifty futures on Singapore Exchange used to show the day ahead for Dalal Street. In recent times, that has become more of an exception than a norm.

More often than not, Nifty has looked totally disconnected with SGX Nifty futures, reflecting a certain decoupling between the two.

The difference between NSE and SGX (Singapore Exchange) is now well known to everyone on Dalal Street, and it has become an issue also for the foreign market players, mainly the hedge funds, trying to get exposure to Indian stock market.

Earlier many hedge funds, which did not want to register directly in India, used to trade in SGX Nifty for India exposure. That’s because India has a lot of compliance norms, tough tax rules and other roadblocks. Singapore is a hub of offshore trading for not only India, but many markets, including China, Japan and Indonesia.

Now, with most of SGX’s India-focused products being halted, investors may either come to India directly or move to other emerging economies. The chances of the first option is better if India continues to attract investors, in which case these FIIs may be ready to bear the additional expenses and compliance costs to either seek direct registration or move to Gujarat International Finance-Tec (GIFT) City, a district in Gujarat state positioned by the Indian government as a global financial hub.

What went wrong? It all started with NSE announcing its withdrawal from a long-term agreement with SGX in line with a coordinated decision among the Indian bourses to pull back overseas futures on Indian indices.

SGX tried to fill the gap by launching a replica of Nifty futures, bypassing NSE. That led to a conflict and a 16-year-old mutually beneficial relationship soured drastically, with NSE dragging SGX to court.

The Bombay High Court has extended the arbitration deadline till December 31, 2020, for settling the dispute between NSE and SGX over the trading of Nifty products. To note, Nifty50 futures remain the third most actively traded derivative contracts on SGX after the FTSE China A50 Index futures and the MSCI Taiwan Index futures.

Now, market participants have taken sides in the wake of these developments. Even though NSE’s existing licence has been extended, investors are unlikely to wait till the last moment to look for substitutes. That’s because India has a roughly 8.5 per cent weightage in the MSCI Emerging Markets Index, while China has 32 per cent, which is four times that of India’s.

India has to increase its clout in the MSCI EM index and at the same time has to work tightly to attract foreign investors by providing benefits such as exemption from capital gains, securities transaction tax (STT) and stamp duty on trades coming through GIFT. If NSE wins the game and government eases some of its complicated norms for registering foreign players, then GIFT has the potential to bring back billions of dollars of business, which India has been losing to rival global financial hubs.

At another level, it also signals growing clout of domestic institutional investors amid a surge in flow of retail savings into financial assets. That also suggests growing maturity of Indian capital markets, which will be contributing more and more to the economy’s growth dynamics in the years ahead.

Source: Economic Times