As per the Global Financial Centres Index (GFCI Report, March 2021), GIFT City is expected to become more significant over the next two to three years, placing it on the list of emerging global contenders.

The report indicates that respondents’ perceptions of GIFT City are favourable and there is a dire need to exploit this “reputational advantage” of GIFT City with genuine improvements in its underlying competitiveness.

Market liquidity and financial market development are closely linked. Insights from various studies on enhancing liquidity in emerging market exchanges across the globe show there’s a need to focus on the following:

Increasing the pool of securities and associated financial products

Promoting the development of a variegated investor base (investor protection schemes, tax incentives, professional and regulated intermediaries, etc.)

Investing in the creation of an enabling market environment (improvement of trading technology such as support for algorithmic trading firms, market and reference data, launching indices, implementation of market-maker schemes, or developing securities and borrowing schemes)

Widen product base

Permitting the trading of rupee, equity and commodity derivatives is a sign of a maturing market. A well-functioning derivatives market can offer a variety of benefits, including more liquidity, because of the interaction between the derivative market and underlying stocks, improved opportunities for hedging and risk transfer, and potentially enhanced price discovery for the underlying assets.

While the domestic stock exchanges have also shown increased volumes in derivatives and Exchange Traded Funds (ETFs), the successful introduction of ETFs in IFSC stock exchanges can pump in more liquidity.

The focus at present seems to be on bringing the products and transactions relating to India, currently being carried abroad, to GIFT City. However, to make GIFT City a truly international financial centre, the focus should also be on bringing the transactions pertaining to the other jurisdictions. GIFT City can replicate the Hong Kong model where, along with being the gateway to the Chinese market, Hong Kong has a global portfolio as well.

This is essential as FPIs investing in India also consists of global funds with exposure to other markets, and to attract them to GIFT City the portfolio of products should also inevitably consist of those based on global stocks.

Clubbed with the tax incentives for relocation and the recent notification of SEBI permitting one-time off-market transfer of securities for relocation to GIFT City, the expansion of portfolio of products would be essential to attract FPIs.

At present, Indian companies are allowed to raise foreign currency by issuing debt securities (foreign currency bonds, masala bonds, green bonds) and through depository receipts. Easing capital raising through GIFT City exchanges would eventually augment liquidity.

SEBI allowing Indian companies to list their equity shares directly on overseas stock exchanges is a propitious step. It will motivate domestic companies through improved liquidity, increased visibility in foreign markets and aiding acquisitions in host market.

Another aspect that would be looked into by domestic companies and start-ups is that, in direct overseas listing, the companies would have to adhere to listing and accounting requirements of India and the foreign jurisdiction, which is not so in the case of GIFT City. SME listing, if permitted, will help improve liquidity of the market and could be a good source of capital for the SMEs in the mainland.

Further, SEBI is yet to permit domestic companies to raise equity capital in GIFT City. Once permitted, this would go a long way in attracting participants.

The NSE IFSC-SGX Connect signed in September 2020, though not elaborate its terms and structure, is expected to bring derivative transactions of Indian stocks being traded in Singapore stock exchange to GIFT City, boosting liquidity in the process. Similar kind of arrangements with other international stock exchanges, wherein derivatives of Indian stocks are being traded, is required to increase the volume in GIFT City.

A few other lessons from global markets merit consideration:

Liquidity is likely to be enhanced if information about asset value is distributed symmetrically between intermediaries and potential buyers and sellers.

A higher “free float” available for any buyer/seller to potentially acquire or put on the markets increases liquidity.

However, it is important to note there is no “one-size-fits-all” solution; what worked in one country may not work in another.

The writer is Founder and Managing Partner, DVS Advisors LLP

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