In November 2007 - a month after the market regulator restricted the use of participatory notes (P-notes) - the share of the Singapore Nifty as a percentage of the total Nifty futures open interest was 8 per cent, according to a study done by Edelweiss Securities.
Less than a year later, the share has surged to nearly 40 per cent of the total outstanding Nifty OI. OI refers to derivative contracts that have not been squared off, leading Finance Minister P Chidambaram to comment last week that the need is to "encourage more inflows and not to export our markets to Singapore."
The minister's comments came after the Securities and Exchange Board of India decided to lift the ban on P-notes, which are offshore derivative instruments that are issued by foreign institutional investors to foreign individuals who do not want to participate in the Indian securities market.
The National Stock Exchange had entered into an agreement with the Singapore Exchange to introduce trading in the Nifty index futures on the Singapore bourse in 2000.
Will be the lifting of the ban help? Analysts say that the relaxation of the P-note policy is a case of "too little, too late". "It is a lot easier to trade in Singapore simply because the costs associated with trading there are lower. Moreover, what is the guarantee that the ban on P-note will not be brought back, once markets begin to boom again?" said a trader, who takes positions on the Nifty in Singapore.
Transaction costs in the Indian markets also continue to be on the higher side. In Singapore, the transaction costs are only 2-3 basis points in the absence of a securities transaction tax. The Singapore bourse has also been taking steps to decrease the cost. Earlier, the SGX Nifty's lot size was around $10 and they decreased it to $2 in November 2007.
Further, the SGX Nifty is traded from 9 am to 6 pm (IST), while the domestic markets open at 9.55 am and close at 3.30 pm. As a result, the SGX Nifty has gained currency among traders who keenly watch the index before the actual underlying, the Nifty opens for trading in India.
"Somebody who has already started trading Nifty futures on SGX would prefer to do that rather than buying the Nifty index in India through the P-note route because it is simpler to take positions there," said Ambareesh Baliga, vice-president-private client group at Karvy Stock broking.
Stockbrokers say that hedge funds do not want to take position in domestic markets because they will have to incur currency risk. The SGX Nifty futures contracts are dollar settled as it is a futures on Defty, not Nifty. So, the only thing domestic investors should do is to have their funds parked overseas, which top market operators have already managed.
Further, most hedge funds do not want to bring their money to India as Singapore is a tax haven for foreign funds. Some of the top market operators from India, who have already parked their funds overseas, prefer to take position in Singapore in order to avoid disclosing their incomes. The low rate of personal and corporate income tax, which is only 20 percent in Singapore, is a further sweetener for unregulated entities to trade in Nifty in Singapore.
One way of stopping the gradual shift in trading volumes to Singapore is to allowing foreign investors to trade in the currency derivatives segment in India, says Yogesh Radke, analyst with Edelweiss Capital. This is because FIIs would be able to hedge their currency exposure in India itself. A sharp movement in the rupee has also forced them to trade in Singapore rather than India.
If the NSE can offer access to hedge currency risk as well as trade in the futures and options segment, volumes will come back, they say. Interestingly, even the Bombay Stock Exchange is mulling listing Sensex futures on SGX in a move to revive the lacklustre derivatives trading on the BSE.
