Gujarat International Finance Tec-City (GIFT), touted as India’s answer to Singapore and Dubai for derivatives trading, is struggling to gain traction. Nine months after derivatives trading was first allowed in GIFT, large foreign players hardly participate there.

On an average, GIFT exchanges now generate Rs. 500-600-crore worth of trading volumes daily, done mainly by domestic brokers registered there.

Open interest (OI), another measure of trader participation, is just a few hundred contracts on GIFT exchanges. BSE offers trading in Sensex Futures and gold, while NSE caters to Nifty and Bank Nifty index futures.

In comparison, Singapore’s SGX and Dubai’s DGCX are far ahead in trading Indian products on their pltaforms. SGX Nifty, India’s most popular derivative contract overseas, alone generates average daily volumes of $1 billion. Indian Rupee trading on SGX rakes up another $1.5 billion worth of volumes daily.

GIFT, a brain-child of Prime Minister Narendra Modi, was supposed to bring back trading volumes in financial markets that India lost to off-shore destinations or tax havens; but that still remains a distant dream, experts say.

Deterring policies

Both BSE and NSE offer trading in GITF, but have found it difficult to attract volumes that have left the Indian shore. Yet, the problem is not as much with the exchange infrastructure, as with government policies.

“India’s law exempting foreign portfolio investors (FPIs) based in treaty countries such as Singapore and Mauritius, from any tax in the derivatives segment, is seen as a cause for GIFT’s failure,” a legal expert working on GIFT-related policies told BusinessLine .

In 2016, when India revised its tax treaty with Mauritius, FPIs were exempted from the 15 per cent short-term capital gains tax. This was a major leeway as derivatives constitute 90 per cent of trading volumes, and the treaty revision lost its sting. Fewer than 35 FPIs have registered for trading on GIFT on each exchange and most of the big names are missing from the list.

While BSE and NSE refused to comment, officials in GIFT said volumes started improving after they launched market-making schemes this month, and growth will be visible soon. From November 1, exchanges have started paying cash to participants for trading daily on their platform.

Rupee trading

“The RBI’s reluctance to permit Rupee trading in GIFT while it continues in off-shore markets unabated, is another example of policy shortcomings hurting the PM’s initiative,” a fund manager said.

The RBI is opposed to dollar-denominated Rupee trading on GIFT as the currency is only partially convertible. Also, regulators have not paid heed to brokers’ demand of allowing them to trade other global markets from GIFT, which is allowed for Singapore- and Dubai-registered entities.

Huge savings in statutory cost is a key attraction of GIFT, which is exempt from securities transaction tax and stamp duty. Both form 50 per cent of levies on equities trading in Mumbai. Also, there is no short-term capital gains tax if traders are based in GIFT, which makes trading almost free.

But the short-term tax exemption is on FPIs own trades and not on their clients.

Also, there is no clarity as to how long these exceptions will remain.

FPIs won’t set up a new base in Gujarat when their clients can play in Indian products overseas with far less regulatory and tax hassles, experts say.

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