Reaching out

The approval of the guidelines governing securities-related transactions in international financial centres in less than a month after the Union Budget in which the Finance Minister had proposed setting them up signals a welcome seriousness about implementing this project. This is good news for both Indian consumers and companies. With Indian as well as international exchanges allowed to set up subsidiaries to operate exchanges and clearing corporations in the IFC, domestic investors may access an array of products ranging from deposit receipts of companies listed on overseas exchanges, to currency and interest rate derivatives. Both the Bombay Stock Exchange as well as the National Stock Exchange have signed memorandums of understanding to operate subsidiaries in the first IFC that is being established in the Gujarat International Finance Tec-City. Since this market will allow almost unimpeded participation of foreign investors, domestic companies will now be able to tap them for equity as well as debt issues. The visibility of Indian companies will also be enhanced as global fund managers, operating out of such centres, grow more familiar with the second- and third-tier Indian companies.

While those are the long-term benefits of IFCs, the urgency is possibly related to the pressing need to control rupee volatility. Apart from the interbank market and the exchange traded currency derivative market for the rupee in India, there is a large market for non-deliverable rupee forwards traded in offshore financial centres such as Singapore and Dubai. A sizeable chunk of the international rupee trades take place in these centres. It was the selling by speculators in the NDF market that had pulled the rupee beyond 68 against the dollar in August 2013. With another bout of instability expected in the currency market once the US begins raising interest rates, the Reserve Bank of India would prefer to shift some of these offshore trades to India, where it can wield greater control. The government is also expecting some of the offshore trades in the Nifty that take place on the Singapore offshore exchange to shift to India once the Indian IFC becomes operational.

The success of these centres, however, will depend on framing regulations in a manner that makes it easy for foreign investors to trade here and in being able to incentivise them to shift their trading bases to India. The RBI is yet to release the framework governing capital flows to and from the IFCs. Controls may have be removed for foreign players and enough relaxation provided to domestic players so that Indian entities can invest in businesses in these centres. Finally, the tax department could help attract investors by not charging securities transaction tax and commodity transaction tax on trades executed in this market.

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