What is the issue?
- Singapore stock exchange and Dubai Gold and commodities exchange are planning to expand their portfolios in India.
- These decisions are taken in a backdrop of uncertain environment for Foreign Portfolio Investments in India.
What are recent portfolios decisions about?
- A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds.
- Portfolios are held directly by investors and/or managed by financial professionals.
- Usually an investors should construct an investment portfolio in accordance with risk tolerance and investing objectives.
- Recently Singapore Exchange (SGX) has decided to offer single-stock futures (SSF) on Indian stocks.
- The Dubai Gold and Commodities Exchange (DGCX) is also considering expanding its portfolio of Indian SSF.
- Volumes in India’s derivatives trading segment is expected to be adversely affected by these decisions.
How these decisions would hurt India?
- Unlike the National Stock Exchange (NSE) and the BSE, the SGX and the DGCX are open 24x7 and these are hard-currency environments.
- There are no transaction taxes akin to India’s securities transaction tax (STT) and the local regulators also place no restrictions on foreign portfolio investors (FPIs).
- Given that the SGX and the DGCX offer comfortable regulatory environments, a lot of the derivatives trading volume will likely shift to these offshore centres.
- India will lose out on tax revenue and brokerage income and traders will face disadvantage of beingresponsive.
Whatare the barriers for FPI in India?
- In July, SEBI banned trading in derivatives via P-Notes and demanded direct registration of FPIs carrying out derivatives trades.
- The regulator said derivatives trading via P-Notes would be allowed only to hedge underlying cash positions.
- At the time of the ban, P-Note holders had open positions of over Rs 40,000 crore in the futures and options segment of the NSE, all of them where closed out after this move .
- A further barrier for US-based funds was that they cannot take direct exposure to derivatives offered by Indian exchanges, which are not approved by America’s Commodity Futures Trading Commission (CFTC).
- Many used P-Notes to bypass that requirement, as both SGX and DGCX are CFTC-approved and Indian exchanges are not.
- High Securities Transaction Tax (STT) in India is being another source of friction for FPIs, which are being significant cost for high-volume traders.
Source: Business Standard
Quick facts
FPI
- Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors.
- It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
- Foreign portfolio investment is different from foreign direct investment (FDI).
Participatory Notes (P-Notes)
- These are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities.
- Any dividends or capital gains collected from the underlying securities go back to the investors.
- Indian regulators are against participatory notes because they fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.
SSF
- Single Stock Futures (SSF) are derivatives instruments that give investors exposure to price movements on the underlying share.
- A futures contract is a legally binding agreement that gives the investor the ability to buy or sell an underlying listed share at a fixed price on a future date.
STT
- Securities Transaction Tax is levied on every purchase or sale of securities that are listed on the Indian stock exchanges.
- This would include shares, derivatives or equity-oriented mutual funds units.
- The rate of tax that is deducted will vary with different types of transactions and securities.
- STT is deducted at source at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.
