SGX Nifty to NSE IFSC: Here’s how it will impact domestic market

The NSE IFSC-SGX Connect is a mutual collaborative effort between the National Stock Exchange of India (‘NSE’) and the Singapore Exchange (‘SGX’) to allow foreign investors to have access to Indian capital market in a more convenient and cost-effective manner. One may recall that the NSE IFSC–SGX Connect was inaugurated by the Hon’ble Prime Minister of India on July 29, 2022, which is now set to be fully operational w.e.f. July 03, 2023. Currently, the foreign investors who intend to have exposure in the Indian capital market do trade in SGX Nifty, which is a derivative of Nifty50 and is listed on SGX. 

What is SGX Nifty?

Nifty50 is a benchmark of Indian stock market index that represents the weighted average of the stock price of fifty largest Indian companies which are listed on the NSE. SGX Nifty, being a derivative of Nifty 50 allows foreign investors to gain exposure to the Indian capital market without having hassle of opening an account in India. It has been a popular tool for investors who wish to hedge their investments in the Indian capital market.  

SGX Nifty has been a source of controversy between the two exchanges, as the NSE argued that SGX Nifty future contracts undermine the NSE’s market and leads to a loss of trading volumes. It has been argued that the foreign institutional investor to prefer trading in SGX Nifty due to low taxation and compliance requirements in Singapore. After a legal dispute between the two exchanges, the matter settled in arbitration and both the parties agreed to route trading through setting up of an IFSC entity at GIFT City.  

Creation of NSE IFSC- SGX Connect

NSE IFSC, a subsidiary of the NSE, established an international exchange in the IFSC to deal in equity index derivatives, commodity derivatives, interest rate derivatives, currency derivatives and depository receipts. In 2020, the SGX and NSE-IFSC created the SGX-NSE IFSC Connect, to bring together international and IFSC-based participants and create a unified order book at NSE-IFSC for USD-denominated Nifty. Under the arrangement, SGX has incorporated an entity in IFSC, GIFT city namely ‘SGX India Connect IFSC Private Limited’ whichwould act as a trading member of NSE IFSC and a clearing member of NSE IFSC Clearing Corporation Limited. This would enable foreign investors to, inter alia, trade in dollar in Nifty derivatives, listed on the NSE IFSC exchange, with the benefit of lower tax rates.

Impact on Indian capital market

On April 19, 2023, SGX informed that all the open positions in SGX Nifty will be migrated to NSE IFSC Nifty after the end of the trading session on June 30, 2023. Post the migration, SGX Nifty would be suspended and subsequently delisted from the SGX.After the proposed transition as aforesaid, all the US dollar Nifty derivatives would be solely traded on the NSE IFSC platform which would increase the trading volumes at NSE IFSC and would deepen the liquidity in the Indian securities market. Amongst others, this is likely tofetch more capital inflows into India, resultantly providing a much-needed boost to the GIFT City, which is primarily established to attract global investors to access Indian markets.

By Harish Kumar

(The author of this article is a Partner at Luthra and Luthra Law Offices India)