Singapore continues to offer convenient and cheaper services to FPIs, say experts.
The government and Sebi have taken several measures to encourage more FPIs to trade on-shore.
By Pavan Burugula
MUMBAI: Foreign portfolio investors (FPIs) continue to be reluctant participants in the Indian derivatives market despite several measures taken by local exchanges and the market regulator to bring them to Mumbai.
The share of FPIs in the total futures and options (F&O) market turnover has barely expanded to 12 per cent in the current FY, from 11.45 per cent in FY18, data compiled by the Securities and Exchange Board of India (Sebi) showed. By contrast, the Singapore Exchange (SGX) continues to maintain its lead over local bourses with more than 1.5 million contracts of Nifty trading on its platform — a level of volume that has barely changed in the past one year.
Singapore continues to offer convenient and cheaper services to FPIs, say experts and custodians. Transaction costs on SGX are at least 20-30 per cent lower than those incurred while trading on shore. Furthermore, FPIs trading on SGX pay single margin-funding for all their portfolios, which comprise other Emerging Market (EMs) baskets such as China, Indonesia, and Malaysia.
“Volumes in SGX Nifty Contracts continue to remain impressive on account of lesser statutory costs and compliances, and also due to the relative ease of trading as far as foreign investors are concerned,” said Tejesh Chitlangi, partner, IC Universal Legal. “The potential collaboration between SGX and NSE in IFSC Gift City, which is in progress, could tilt the scales in favour of on-shore trading.”
India accounts for only a small portion of the total trading undertaken by big-ticket FPIs and it would not be viable for them to pay separate margins and meet additional compliance requirements. Industry estimates suggest India’s weight among global FPIs is less than 5 per cent, while the share goes up to 10-12 per cent if the fund is EM-dedicated.
To get FPIs to come on-shore, Indian stock exchanges snapped their data sharing agreements with foreign bourses in February. This decision snowballed into a legal battle between the National Stock Exchange (NSE) and SGX. The matter is currently under arbitration and a final verdict is expected by February.
The majority of FPIs trading in onshore derivatives are India-dedicated funds or those that have significant exposure to Mumbai markets and use derivatives for risk management, said a custodian with a global bank.
“To boost the derivative volumes, we need hedge funds who account for the bulk of F&O trading in the developed markets,” the custodian added.
“FPIs are unlikely to move their derivatives exposure on-shore until SGX continues to offer Indian derivatives on its platform. SGX offers better deals to FPIs compared to Indian exchanges, from the tax and commercial points of view,” said Bhavin Shah, partner, PWC.
“Even Gift City will attract foreign investors in large numbers with sufficient liquidity and volumes only if SGX stops trading Indian derivatives.”
The government and Sebi have taken several measures to encourage more FPIs to trade on-shore. The government has provided several incentives for using the International Financial Services Centre (IFSC), including tax sops and single application form for FPI registration. Sebi also relaxed several compliance requirements.
However, activity in the IFSC Gift is still in a nascent stage as the platform just witnesses volumes of $500-700 million every day. Liquidity concerns are keeping FPIs away from the platform, say experts.
Sebi also proposed to make derivative trading round the clock. The proposal, however, has been stuck due to reservations expressed by stock exchanges.
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