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BSE INX at GIFT City not exactly off to a rocking start

LiveMint logoLiveMint 29-03-2017 Jayshree P. Upadhyay

Mumbai: BSE Ltd’s India International Exchange (INX), which was billed as an answer to Dubai and Singapore when it was launched at the Gujarat International Finance Tech (GIFT) City in January, hasn’t exactly got off to a rocking start.

Daily turnover, in lots of about 500, has averaged between $500,000 and $600,000, less than expected.

Market participants say lack of sufficient number of products, absence of clarity on foreign investor participation and slow broker registrations are some of the reasons for the slow start.

Aware of the issues being faced by the exchange, the Securities and Exchange Board of India (Sebi) will allow the BSE-sponsored exchange to launch 4-5 products in the coming fortnight, said two persons aware of the regulator’s thinking on condition of anonymity.

An e-mail sent to Sebi did not result in a response. A spokesperson for BSE declined to comment.

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Regulations allow exchanges in an International Financial Services Centre to launch products across categories, but INX has approval to trade only in the Sensex, Sensex 50 and five foreign equity derivatives.

“This is not enough, there are hardly any takers for the foreign futures owing to lack of clarity on how to onboard customers. The Sensex and Sensex 50 are new contracts that have not been traded in India before, so they are thinly traded,” said a market participant who didn’t want to be named.

“Whatever trades that are happening at the exchange are happening through proprietary trades by brokers that are operating out of GIFT,” said the head of a brokerage who also sought anonymity.

Sebi is considering allowing INX to launch commodity contracts, currency derivatives—barring rupee-dollar contracts—and futures and options in 10 large-cap Indian stocks.

The BSE INX at GIFT City INX has approval to trade only in the Sensex, Sensex 50 and five foreign equity derivatives

“Sebi’s risk management review committee had met in the first week of March and recommended launch of commodity, currency and derivatives trading in Indian stocks that are traded in international markets as well. The regulator has accepted the recommendations and the trading in some of these will be allowed by the second week of April,” said one of the two persons cited in the first instance.

BSE submitted a list of at least 10 products to Sebi that it wants INX to start trading in. These included commodities such as gold, silver, crude, rupee-dollar contracts and equity derivatives. Among these, the launch of rupee-dollar contracts may take a while.

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“BSE’s biggest bet is on rupee-dollar but it may take some time as the Reserve Bank of India (RBI) has concerns with any contract that has rupee as one leg. The central bank is worried that as these contracts would be settled in dollar and in off-shore markets, it could be a case of legitimizing non-deliverable forward (NDF),” said the second person.

“Sebi in consultation with RBI will allow exchange to launch currency contract where rupee is not a part of it. For instance, euro-dollar,” he added.

On the commodities front, the regulator had been slow in allowing this category of products primarily owing to the potential impact on the domestic market.

“There is a fear that trading of commodities in GIFT can impact domestic volumes as there is no Commodity Transaction Tax. But, the fear is unfounded as the investors are completely different. Foreign investors can’t trade in commodities market and Indian investors can’t trade at IFSC. Sebi’s risk committee has recommended in favour of commodities,” said the first person.

"Sebi in consultation with RBI will allow exchange to launch currency contract where rupee is not a part of it. For instance, euro-dollar"- A person familiar with the matter

Products are just one part of the problem. Another major concern is lack of clarity for foreign participants and specific tax dispensation.

“Foreign portfolio investors (FPIs) have no major tax benefit. All the products currently trading in INX are of short-term capital gains nature, where there is no specific tax dispensation for FPIs,” said the market participant quoted earlier.

While Sebi has allowed registered and non-registered FPIs to trade in IFSCs under eligible foreign investor (EFI) category, it is practically not possible, said the head of the brokerage.

“When EFIs try to open their account with a bank that has its operations in GIFT, they are unable to do so. The RBI rules do not allow any non-GIFT entity to open an account for trading purposes,” he explained.

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