New Delhi: In a major step towards establishing India as a global financial centre, an equity index that earlier was being operated in Singapore will now entirely be traded from GIFT City, India’s first International Financial Services Centre (IFSC), in Gandhinagar.
The SGX Nifty — based on India’s National Stock Exchange’s (NSE) Nifty index — is the first cross-border initiative connecting India and Singapore’s capital markets. With its shift from the Singapore Exchange (SGX) to NSE’s International Exchange (NSE IX) located in GIFT city, the index has also been renamed the GIFT Nifty.
The SGX used to trade in US-dollar denominated contracts of Nifty futures and options under an agreement with the NSE. According to news reports, the volume of this trade reached relatively significant levels, and touched $3.9 billion of daily average turnover in 2022.
The shift of the exchange to India inaugurates the full-scale operations of NSE IFSC-SGX Connect, a planned collaboration between SGX and NSE for trading stock index-based products and for promoting global investments on Indian shores.
The GIFT Connect brings together international and onshore GIFT participants to create a bigger liquidity pool for Nifty products. In other words, this will not only deepen the Indian market, but also increase its international reach and acceptance.
In a press statement, Injeti Srinivas, the chairman of the International Financial Services Centres Authority (IFSCA), said: “The transition will consolidate the international liquidity pool for NIFTY products and will give a boost to GIFT-IFSC as a global hub for international financial products and services”.
IFSCA is a unified authority for the development and regulation of financial products, financial services and financial institutions in the IFSCs in India.
ThePrint takes a deeper look at the transition and what it means for the Indian economy.
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What is GIFT city & GIFT Nifty?
GIFT City is India’s maiden international financial services centre. Located in between Ahmedabad and Gandhinagar, this under-construction business district is India’s first fully-operational greenfield smart city.
It will provide an ecosystem for crucial economic activities with globally benchmarked regulations, taxation, and policies.
GIFT Nifty, formerly known as SGX Nifty, is an index derivative contract. Derivative contracts are financial instruments whose value is derived from an underlying asset. In this case, these derivatives are based on the price of company stocks. While people can directly trade company stocks with each other, they can also separately trade these derivatives.
The NSE IX launched trading in June 2017. The move of the SGX Nifty to Gujarat provides an alternate way to access US dollar-denominated Nifty derivatives.
On 3 July, trading at this USD-denominated GIFT Nifty started with an open interest of USD 8.05 billion in Nifty Futures and of USD 1.05 billion in Nifty Options from Singapore exchange’s international clientele, executing over 30,000 trades in a single session.
Open interest is the total outstanding derivative contracts that have not been settled. In other words, it is an indicator of the trading activity that is taking place on the exchange.
GIFT Nifty will operate for two sessions everyday stretching over 21 hours. The first session would be from 6.30 am to 3.40 pm and the second would be for attracting the European and American investors from 4.35 pm to 2.45 am as per the Indian Standard Time.
What is NSE IFSC-SGX Connect or GIFT Connect?
India’s NSE has shared a relationship of more than 22 years with the Singapore Exchange.
Inaugurated in July 2022, the GIFT Connect is a collaborative dual arrangement between SGX and NSE to allow global investors to trade in Indian stock derivatives without any regulatory hassle.
A similar arrangement to set-up a cross-boundary investment channel connects the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Earlier, such trades were possible only via the Singapore exchange.
GIFT Connect unifies both international and domestic participants, thus creating a deeper pool of liquidity available for investment and an expanded shelf of Nifty products that can be invested in.
This shift to Gandhinagar will integrate the GIFT City ecosystem with international financial markets and thus lure foreign investors to GIFT City, which offers close to zero tax, dollar contracts, and top-notch infrastructure.
The NSE IFSC-SGX Connect collaboration has been in talks since 2019 post a brief feud between the two global markets. In 2018, the NSE ended its licensing agreement with SGX. Singapore Exchange later launched derivative products which, for NSE, breached its intellectual property rights.
According to a Business Standard report, the NSE filed a court case in Bombay High Court without giving notice to SGX. The issue was later settled in September 2020 after both the parties agreed to a tie-up.
The NSE IFSC-SGX Connect arrangement was negotiated by the NSE in 2020 through a collaborative agreement. The contract is valid for five years from the date of implementation and may be extended for another two years.
SGX will initially get 75 per cent of the revenue generated from the GIFT Nifty and the remaining 25 per cent will go to NSE. Only once a “threshold volume” of revenue is reached, will the sharing be on a 50:50 basis.
How will GIFT Nifty benefit investors?
The transition comes in as India’s attempt to attract India-centric trading and compete with global financial centres like Dubai, Mauritius, and Singapore. India aims to raise funds for Indian products, get markets onshore and promote the setting of prices of Indian products in dollar terms in all time zones. In other words, the idea is to internationalise India’s derivatives trade.
Indian retail investors, however, cannot trade in GIFT Nifty under RBI’s Liberalised Remittance Scheme (LRS). While the scheme permits Indian citizens to remit funds abroad up to $250,000 per financial year, it places certain restrictions on offshore investments.
The move to India will also benefit foreign investors who will now be eligible to avail exemptions from the Securities Transaction Tax (STT), commodity transaction tax, GST, dividend distribution tax and capital gains waivers that have been made available to entities operating in the GIFT Special Economic Zone.
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Why was a shift needed?
Nifty derivative contracts were the second-biggest contributors to SGX’s equity-derivative volumes in the fiscal year 2022, standing at 29.9 million contracts.
Singapore is a busy offshore financial centre that offers low taxation rates, easy registration, and operation facilities. This attracts many overseas traders wanting to avoid the hassle of registration with a seemingly more strict Securities and Exchange Board of India (SEBI) — India’s apex regulatory body for securities and commodities market.
The SGX Nifty was used by traders to get an early indication of Nifty 50 before the Indian market opened, taking advantage of the time difference between Singapore and India.
The volume of SGX Nifty futures swelled over time, equalling the volume of trade in these instruments that was happening in India. In a broader effort to keep control of capital, the Indian government felt these trades should happen within India, thus accruing benefits to the nation.
To discourage offshore trading and promote a tax-free trading zone in Gujarat, attempts were made to integrate the nation into the global financial system.
(Edited by Anumeha Saxena)
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