PM Modi to launch SGX Nifty trade at GIFT city: All you need to know

The SGX Nifty futures contract, which is currently traded on Singapore Exchange, will debut in Gujarat International Finance Tech (GIFT) City on Friday. Prime Minister Narendra Modi will launch the dollar-denominated Nifty futures and inaugurate the India International Bullion Exchange.

What is the SGX NIFTY

SGX stands for Singapore Stock Exchange. Nifty50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange (NSE). SGX Nifty is a derivative of Nifty, which trades officially on the SGX and thus, moves with respect to Nifty50. 

Why bring it to India? 

The index opens at 8:00 AM Singapore time and trades for about 16 hours a day. The operating window of 16 hours a day coupled with more favourable taxation and preference for a dollar-denominated product resulted in more volumes for the Singapore Index in comparison to the Indian index futures as Foreign Portfolio Investors (FPIs) shifted their positions to Singapore. 

"The move to bring SGX Nifty to the GIFT city is aimed at bringing those volumes to India. Additionally, trading on GIFT City would also benefit the FPIs and other foreign investors as they will be subject to minimum alternate tax (MAT) of 9 per cent and along with exemptions concerning stamp duty and tax as in a bid to make it competitive with other regional financial hubs such as Singapore, Dubai, and Hong Kong, the taxes at the GIFT City have been slashed by the Government," said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors. To enable international access to Indian capital markets and create a larger liquidity pool of international and domestic participants, SGX has set up SGX India Connect IFSC Private Limited, a special purpose vehicle at Gujarat International Finance Tec-City (Gift City), in Gandhinagar, India. 

Key facts:

Nifty Futures volumes in Singapore are more than 80% than in India due to a favourable tax regime and transaction in US Dollars. To lure investors, the Government has lowered tax a GIFT City, competing with financial hubs such as Hong Kong, Dubai and Singapore. 

This move comes after both NSE and SGX went to court over a dispute over a flight of trading volumes to Singapore. 

The model is aimed at enabling members of SGX and NSE IFSC to trade in Nifty products at GIFT, while managing their exposures through their respective clearing corporations. 

Once fully live, orders for the Nifty-based derivatives contracts from trading members based in Singapore will be routed via SGX-ICI to NSE IFSC for trading and execution. SGX Nifty Futures would initially be traded simultaneously on GIFT-IFSC and SGX with the latter discontinuing trading in due course and would be traded for close to 19 hours a day. 

Why is the SGX Nifty so popular?

Nifty derivatives contracts on the SGX are among the most traded, as they are used by global investors to hedge their exposure to India. 

The SGX Nifty or the NSE Nifty Futures trading on Singapore Stock Exchange is a popular instrument with foreign investors who take a bet on Indian markets without having to open an account in India. This basically means that foreign investors who don’t desire to trade in India, use Nifty contracts on SGX. 

"Twenty four hours a day trading (via after market trades) and Lower Singapore Taxes provided them another advantage. Given Singapore markets open before India (SGT is 2.5 Hours ahead of IST); this allows investors to make pre market moves and for some, it serves as an indicator to how the Indian markets will open. Given all this, the NIFTY volumes in Singapore was much higher than in India. With the negotiated deal between NSE and SGX, this is now moving to GIFT City in India to attract global investors as well as Indian investors interesting in taking their portfolio global," said Abhishek Dev, Co-Founder and CEO,Epsilon Money. 

Why Nifty futures matter:

The Nifty is the worlds largest traded derivative index in the off-shore market and a top volume generator on the Singapore Exchange (SGX) and reportedly generated 10 per cent of its volume. Nifty contracts on SGX are popular among foreign investors, who did not wish to trade in India. Non-resident Indians and Foreign Institutional Investors preferred the SGX due to the tax concessions and the relaxed norms and compliance requirements. 

The Tussle

In this backdrop, the Singapore bourse was planning to start its own derivative products based on publicly available settlement prices of Nifty futures but in early 2018, India's stock exchanges decided to stop licensing their indexes to foreign bourses from August 2019 amid concerns over the flight of trading activity by foreigners to Singapore. Since India did not want offshore migration of Indian derivatives trades, NSE abruptly ended its licensing agreement with SGX that enabled the latter to launch Nifty products on its platform. 

SGX dragged NSE into a legal dispute and the issue finally for arbitration. Both exchanges withdrew the arbitration in September 2020 after they agreed to route trading through the International Financial Services Centre in GIFT City. 

Why is the project so important?

The project's success is critical to meet the government objective of creating a larger pool of liquidity in the onshore market. Better liquidity in the NSE IFSC means Nifty contracts getting traded onshore and the revenue remaining within the country. 

Moreover, now Nifty Futures trading in dollar terms on SGX-NSE Connect platform, which is currently on SGX will move significant business out of SGX in Singapore to this centre in Gandhinagar. 

Some of the notable global clients include LCH London, TMX Canada, Nasdaq Dubai, Euroclear, New Zealand exchange, Strate South Africa, Philippines Depository and Kuwait Clearing Company. 

What purpose will this contract serve?

According to V M Kannan, Senior Associate, SKV Law Offices, there are two big advantages: 

(a)SGX Nifty are among the most traded ones and the volume would come entirely to India is due course. 

(c) The Government’s vision to get maximum foreign investment is also likely to get a push as more foreign investors are getting attracted to the heavy tax cuts and exemptions. At present, foreign investors enjoy a minimum alternate tax of 9% and enjoy exemption from stamp duty, GST etc. 

More dollar inflows for India

" Currently the overseas investors (FIIs) tend to hedge their exposure in India by initiating trades on the SGX Nifty. This means price guidance for Indian traders comes from Singapore, atleast pre-open. Post listing in India, those trades will be initiated in India. Secondly business of these FIIs was getting diverted to Singapore, which will now hopefully come to Indian firms," said Vijay Bhambwani, Head of Research Behavioral Technical analysis at Equitymaster. 

Moreover, due to the extended trading hours of SGX Nifty, FIIs were keeping money in Singapore for such trades. That meant dollar inflows were reduced for Indian markets. Now we may get higher allocation to Indian markets by FII traders. 

More foreign capital for India

"SGX Nifty, which is a derivative of the Indian Nifty, index pulls in 80% more volume than the local index futures. So bringing that volume to India by bringing the SGX Nifty to the GIFT city is a fantastic move to bring in foreign capital to India. SGX, which initially protested this move is now collaborating with GIFT city with a connectivity pact. For the first few months, SGX Nifty Futures will be traded simultaneously on GIFT-IFSC and SGX. Later, SGX will discontinue the trading of the product from Singapore. SGX Nifty Futures will be traded at GIFT city for close to 19 hours a day," said Sonam Srivastava, Founder at Wright Research, SEBI Registered Investment Advisor. 

GIFT city is envisioned to become a Indian financial hub for all global investors.

"Since SGX Nifty is a widely accepted trading platform for foreign investors, the launch of SGX Nifty Futures at the GIFT city will surely help accelerate the development of Gift City. This move coupled with lower transactional costs and tax incentives on account of trading at Gift City are likely to be key factors which may result in increased foreign investor participation in the Gift City during the days to come. The extended trading timings for SGX Nifty, may also witness increase in trading volumes on account of domestic institutional participation, all of which are likely to boost the development of physical and financial infrastructure in the Gift City," said Jayesh Kothari, Associate Partner, DSK Legal. 

"This will be the first step in enabling global investors to access Indian products with the tax advantages available under the GIFT City. We can expect that more products would be launched in the GIFT City to attract global investors to come in into India. These products would also help global investors hedge their risks. Once the trust of the global investors is established, this will enable higher volumes for such products, better pricing and easier access to funds from global investors to the Indian market," said Ankit Jain, Partner, Ved Jain & Associates.