India’s first International Financial Service Centre (IFSC) in the Gujarat International Finance Tec-City (GIFT) has been growing by leaps and bounds over the last two years. The country’s oldest stock exchange, the BSE, has begun facilitating trading in the GIFT city through its wholly-owned subsidiary — India International Exchange (INX) — in January 2017. The MD & CEO of INX, V Balasubramaniam, talks to BusinessLine about the road travelled so far and the challenges in improving trading volume on the fledgling exchange.

What has been the progress in the INX exchange so far, how many intermediaries have been registered and how many people trade on a daily basis?

As we speak, the volume has averaged around $900 million over the last few days. Our peak volume has been around $1 billion on a couple of days. As of now, close to 88 brokers have been approved by the SEBI to start operations in the GIFT City and around 42 brokers have already begun operations.

On a daily basis, 30-odd members trade regularly. Our two liquid products are India 50 futures and options, which are clocking roughly $300 million volume each. We trade gold futures worth about $300 million in a day. On some days, the gold futures volume on the INX is higher than the gold futures volume on MCX in near month contracts. Our volume in gold contracts is much higher than the DGCX (Dubai Gold and Commodity Exchange).

Which category of investors are allowed to trade on the INX? What is impeding the volume growth on the exchange?

As of now, mainly proprietary trading is being done by intermediaries. We are trying to on-board foreign clients as eligible foreign investors (EFI) because there is still no clarity on how FPIs can move their funds from India to the GIFT IFSC.

That is one reason why FPIs have not yet begun investing in the GIFT IFSC. Instead of compromising their existing FPI account, they may prefer to open a clean account as EFI.

Secondly, many FPIs are watching the ongoing NSE-SGX clash. If it is decided that Indian indices and stock futures cannot trade on SGX, FPIs may have to change their investing destination too.

Third, a couple of months ago, the SEBI allowed FPI investments through the Segregated Nominee Account. This is a quasi omnibus route that is expected to result in more FPIs trading on the INX. Our biggest worry is that not a single NRI has begun trading on the India INX; this segment is our equivalent of a retail segment. Regulations do not allow individuals to open bank account in GIFT City and this is a hurdle.

But some movement is taking place to address this. NRIs could be allowed to transfer money to the broker’s account and their gains could then be repatriated.

Indian retail cannot participate in the GIFT exchanges because they cannot use the liberalised remittance scheme (LRS) limit to trade in derivatives. Once other securities are offered on INX, Indian retail too can take part.

Can you explain how the Segregated Nominee Accounts work?

The way it works globally is: the client details are disclosed only to the main global broker.

The global broker uses a carry broker to carry out stock market transactions, typically in another country. So, the customer’s identity is not known to the carry broker, exchanges or the regulator in the jurisdiction where the transaction is executed.

We did not want to adopt such a radical method, so we have modified this process. There will be SNAPs (Segregated Nominee Account Providers) who will do a full KYC with India INX. SNAPs can be a broker at the GIFT IFSC or trading or clearing member in any IOSCO recognised jurisdiction or a FPI registered in India. These SNAPs will route the client’s order through intermediaries registered in GIFT. SNAPs registering on INX need to have a net worth of $5 million.

The SNAPs will have to do a one-time KYC for clients who wish to transact on the GIFT exchanges and obtain a LEI (legal entity identifier) number for each client from the exchange.

This number will be mentioned in all transactions. Thus, the identity of the client will be known to the exchanges but will be hidden from the intermediary transacting on the INX platform. The same arrangement was done by South Korea in 2015.

But why mask the identity of the ultimate client?

One of the constant complaints of FPIs investing in India is that the market is an ID market; that is a market where the identification of the buyer and the seller is known to everyone. In many of the global investor summits that I attend, I am slammed for this.

In many western markets, this information is not disclosed. In these jurisdictions, the SNAPs are trusted by regulators and there is belief that they will cooperate, by providing all the details about a client, if there is any issue.

How competitive are the GIFT exchanges in relation to exchanges on other IFSCs with respect to taxation and transaction charges?

Our transaction cost is a fraction of what others charge, because we have not begun charging for transactions.

Even if we do, we will be charging 25 cents to 50 cents per lot. DGCX charges around 96 cents per lot; Singapore Exchange charges $1.5 to $2 per lot and CME charges close to $1.6 per lot. On the taxation side, we have already achieved a lot. In addition, the Budget has stated that if a foreign client trades on IFSC exchanges, it will not be treated as a capital transfer. So there will be no capital gains tax on GIFT trades. This change has put us on a par with the SGX.

Do you think that if the NSE-SGX arbitration goes in the NSE’s favour, foreign investors would be willing to shift from SGX to GIFT? They are trading on GIFT because it is a more liquid platform, isn’t it?

There will be an initial resistance to change, but eventually they will move here because, in terms of ecosystem offered by GIFT City — with respect to taxation, transaction charges, ease of doing business — it is comparable to the SGX.

The GIFT exchanges are superior to domestic exchanges because FPIs on domestic exchanges are using double taxation avoidance treaties to avoid tax. This is not required on the GIFT.