When GIFT City’s international financial centre was inaugurated in 2015, it was intended to act as a conduit to help Indian companies and investors go global, open up the Indian economy to foreign capital and bring offshore trading in Indian stock and currency derivatives back to Indian shores.

In other words, the GIFT City was to play the role Hong Kong has, in acting as a link between Chinese companies and international investors.

With eight years having passed, the dream of making the GIFT IFSC India’s Hong Kong is still some way away. But then, these transitions do take time. The government has been quite focused on getting the ecosystem ready and the tax leeway provided to investors and companies in the IFSC is on par with other offshore centres. GIFT City now has a regulator, IFSCA, and an international arbitration centre. Number of banks, brokers and other entities have begun operations in the offshore centre.

But activity in the GIFT IFSC, especially the stock exchanges, has not picked up in a meaningful way as yet. The situation is akin to getting the party venue ready with all the trappings and positioning the staff in the right places to welcome guests. But the guests wavering about entering the venue.

What’s stopping foreign investors? These investors typically flock to well established offshore centres, preferably set in scenic locales, with a well-established and thriving pool of investors. Entry and exit rules need to be easy and regulators need to be warm and welcoming. It’s evident that lot of work needs to be done before GIFT IFSC gets there.

Recent experience during the migration of SGX Nifty contracts to the NSE IX exchange in the GIFT City shows that foreign investors will need lot of cajoling before they open branches here.

SGX Nifty in GIFT City

Currently both the BSE and the NSE have subsidiaries established in the GIFT IFSC, India INX and NSE IX respectively but participation of domestic and foreign investors is quite low on these exchanges with bulk of the trading being done by brokers themselves.

Activity on NSE IX perked up in FY23 with the establishment of the SGX GIFT City connect to migrate SGX Nifty contracts to the NSE IX. The connect was intended to help brokers of SGX to route orders in SGX Nifty to the NSE IX, for trading and execution. The clearing and settlement of these contracts was, however, to take place in Singapore.

This arrangement is a half-way house. It allows foreign traders and investors to place the orders through their broker in Singapore, the foreign investors do not deal with the brokers in GIFT City or Indian authorities in any way. This connect, therefore, does not help in increasing participation on the GIFT City exchanges.

With clearing and settlement taking place in Singapore, neither does the investor money come to India, nor are their assets held in India. In other words, the clientele of SGX have been completely ring-fenced from the GIFT IFSC.

Has the migration of the SGX Nifty to GIFT City helped trading volume? No. Daily average turnover on the NSE IX was around $850 million in April and May 2023, it inched up to $1.5 billion in June, as the deadline for the migration drew near. Turnover has however slowed down again to around $1.2 billion in July, indicating that not too many fresh GIFT Nifty contracts are being traded on the exchange.

A look at the trading turnover on the Singapore stock exchange shows that traders have been weaning themselves away from the SGX Nifty contract, in anticipation of the transition. Trading volume in SGX Nifty 50 futures was 39 per cent lower in June 2023 when compared with June 2022. Similarly, volume in SGX Nifty Bank index futures had declined 52 per cent in June 2023, compared with last year.

Why are foreign investors hesitant?

India has virtually rolled out the red carpet for foreign investors trading on the GIFT city exchanges. But despite these, foreign investors could be hesitating due to three reasons.

One, Indian regulators have been quite wary about allowing a free run to Indian and foreign investors on the GIFT IFSC. The RBI has been very slow in relaxing the rules regarding deployment of LRS funds in the IFSC, opening of bank accounts by resident Indians in the IBU etc. , allowing rupee derivatives to be traded on the GIFT exchanges and so on. The laws on repatriation of money out of the GIFT City is also quite stringent.

Similarly, category III and IV FPIs, which include hedge funds and other high-risk investors are not allowed to participate on the GIFT IFSC.

Two, as the saying goes, liquidity begets liquidity. It is mostly a chicken and egg situation with most stock exchanges and offshore hubs, with the first mover advantage getting all the liquidity. Three, the location of the GIFT City in the dry State of Gujarat appears to be a problem too.

Attracting foreign investors could be an uphill task, at least to begin with. So, the initial mass has to be provided by domestic investors. RBI needs to do an important tweak to its rules to allow Indian investors to trade on GIFT exchanges. It needs to allow the use of LRS proceeds to trade in derivatives on GIFT exchanges. Once this is done, domestic investors can begin trading in GIFT Nifty and other derivative offerings.

Another change that RBI can contemplate is stipulating that investments in to shares listed on overseas exchanges by resident Indian investors, (both individual and institutional investors) has to be routed through the global access provided by GIFT City exchanges. The domestic traffic can increase if this is stipulated.

Third, both RBI and SEBI need to cut a little slack to investors in the GIFT IFSC. The registrations as well as exit procedures and repatriation of funds need to be much easier. If regulators are unwilling to ease up, the GIFT IFSC is doomed to stay on the slow lane for a long time.

Finally, as an expert observed, the Indian IFSC should have been set up in Lakshadweep or Goa, for it to attract foreign investment fraternity. Since relocation of the IFSC appears out of question now, relaxing the prohibition of alcohol within the GIFT City could be a first step.