Singapore is not quite a threat to the domestic stock market yet, but it is getting there. ‘Futures' contracts on a basket of Indian stocks (SGX Nifty) now register a tenth of the volume at the National Stock Exchange for similar contracts.
Volumes in SGX Nifty futures traded in Singapore surged to a record high and were up 30 per cent in 2011 over the previous year.
The number of (monthly) contracts traded in the ‘SGX Nifty Futures' has grown 70 per cent in the last two years. In contrast, the number of contracts traded in the domestic Nifty futures has dipped, with the action shifting to the ‘options' market.
Volumes in Singapore now amount to nearly 10 per cent of the Nifty future volumes on the domestic bourses, up from 6 per cent at end-2009.
What accounts for the popularity of the SGX futures?
One reason seems to be lower transaction costs in Singapore compared with the local markets. For every lakh of turnover (a round-trip transaction) in Nifty futures, an investor has to shell out Rs 29.06 on the NSE, against Rs 11.22 at SGX. Another factor is anonymity. While investing or trading in the Indian market requires global investors to register with SEBI, there is no such requirement for positions taken on the Nifty in Singapore.
Volatility in the rupee-dollar exchange rate and the associated transaction costs could also have driven the popularity of the Singapore-SGX. SGX Nifty futures are dollar-denominated, while local futures are rupee-denominated.
In 2010, when the Indian stock exchanges extended trading hours by one hour, SGX too extended its work timings by 50 minutes. Today, this exchange trades for more hours (totally nine hours) than the National Stock Exchange.
Transaction costs at SGX work out to less than half the levels in the Indian market ( see table ). The securities transaction tax and stamp duty that are levied on buy/sell transactions in the Indian market are not charged in Singapore. That makes a big difference to traders who play the market for speculative gains.
Trading Nifty futures on the SGX would also have saved global investors from the costs involved in transacting in rupees instead of their default currency, the dollar. The other reason for the popularity of the SGX is that it allows investors to take speculative bets on the Indian index, without registering with SEBI. The first time SGX reported a record surge in volumes in Nifty futures contracts was in 2007, when SEBI had imposed restrictions on the issue of participatory notes (P-notes) in India. Thereafter, though the norms were eased in India, volumes continued to grow in Nifty futures on the SGX. Liberal entry requirements and less stringent KYC norms there favour investors, say observers.
Incidentally, investors who would like to take a call on the Indian market while retaining a cloak of anonymity do seem to be on the rise. In the domestic market, the outstanding number of P-notes at the end of November 2011 had nearly doubled from a year ago. According to SEBI, the outstanding value of these instruments crossed Rs 60,000 crore in October 2011. The last time they were above this threshold was in November 2007.
Participatory notes are derivative instruments issued by FIIs and their sub-accounts to investors who do not wish to register with SEBI.