Global Finance Comes To India

On 17 january, the first trades on the India International Exchange (India INX) took place, marking a new beginning in the era of international finance. For years, international finance has been dominated by centres in London, New York, Hong Kong and Dubai, among others. Now India seeks a place in the global financial sweepstakes and will soon offer derivative products, for starters, of the world’s largest companies, including Apple and Alphabet, as also commodities and currencies. The question is, will it scale up, and how soon?

For now, India INX has started trading in a derivative of the Sensex that has been slowly seeing an increase in trading volumes. Total traded volumes are in the range of about 300 contracts, and $2.7 million in traded turnover as per the latest figures. Going by international standards, there is a long way to go.

For a start, though, India INX was set up in record time and will enjoy a whole host of tax benefits, including exemptions from many Indian and local taxes. In fact, the securities transaction tax and other taxes are not applicable on this exchange, except for a 9 per cent minimum alternative tax, which has been specially reduced from 18.5 per cent in Budget 2016-17. These provisions are exclusive for the International Financial Services Centre (IFSC), which is a specially designated building in Gift City, Gandhinagar.

India INX has plans to set up a depository so that companies from India and abroad can raise funds on the exchange. Says Ashishkumar Chauhan, Managing Director and CEO, BSE: “Whatever is allowed in the international markets will be allowed on this exchange. We will keep adding more instruments as we get permissions.” Chauhan is optimistic that the skills of Indian finance professionals and the lower costs of operations in the country will play a big role in drawing more participants to the exchange.

Prime Minister Narendra Modi mooted the idea of the exchange in 2013. Later, the BSE signed an MoU with Vibrant Gujarat, though effectively work on constructing the exchange started just five months ago as the tax laws were yet to be notified. In Budget 2016, the government carved out special provisions, to provide exemptions to the IFSC to make it comparable (regarding tax benefits) to many international finance centres across the world.

During the launch of India INX, PM Modi said that it was a momentous occasion. “It is a vision to create a world-class IT zone for India to provide services not only to India, but to the entire world. In those days, and now wherever I go, I would meet some of the top financial brains of those countries. I would find many of them to be of Indian origin. I was impressed by their understanding of the financial world and of the contribution they made to their adopted countries. I used to think: What can we do to bring this talent back and, simultaneously, offer leadership to the entire financial world.”

BSE will invest Rs 500 crore in the exchange over the course of time. India INX was set up in the IFSC in no time and began mock trades in both Mumbai and Gandhinagar from December 2016. “BSE’s expertise in managing surveillance, settlement and banking systems helped us in setting up our systems,” says Chauhan.

India INX also boasts of blazing fast speeds, which is the quickest in the world, essentially four micro-seconds, that is, four millionths of a second. The nearest fast exchange is at the BSE in Mumbai, which is six micro-seconds, and the third is in Singapore, with 60 micro-seconds. Chauhan says, “We had to create a data centre and we had to create regulatory and IT teams. It is going to run for 22 hours, leaving two hours for maintenance.” Given its strategic location, India INX hopes to straddle all time zones, right from when Japan’s market opens to when developed western markets close for the day.

India INX has applied for a whole host of derivative products in the initial phase because they are easy to trade and settle. In the second phase, once depositories are set up, international firms would be able to raise funds through depository receipts. “Probably for the first six months or so we will be trading only in derivatives of equities, commodities, and in interest rates,” informs Chauhan. “Success is measured in terms of trading, but we want to work on raising money as well,” says Chauhan.

Some of the global indices that are available in BRICS nations could potentially trade on the bourse, along with other indices. Unfortunately, resident Indians are not allowed to trade on the exchange. Foreign portfolio investors get automatic entry on India INX platforms.

But will the arrival of this exchange impact trading volumes on older domestic exchanges? While Chauhan reckons that volumes may be impacted, the larger role that the exchange would play in raising resources for domestic and international companies would give a fillip to growth in the country. India INX will settle all its trades in dollars and some other currencies, depending on the demand for such currencies. The cost of setting up businesses in India is a fraction of that overseas and, hence, Chauhan expects that once Gift City is fully functional, India INX could carve a niche of its own in global markets.

In the global financial sweepstakes, volumes so far are tiny to begin with. Around 90 brokers have signed up for premises and membership and several more are expected to join. However, the process can take time as global investors may prefer to join only when there are sizeable volumes.

The project is being seen as a challenge, and there’s growing optimism that over time, the pay-offs will be visible. “We have shown the whole world that India can also put up something for the global community,’ says Niranjan Hiranandani, MD, Hiranandani Group. “Even if 1 per cent of the world’s business comes to India we will do more than the Indian market in terms of operations.”

‘WE WANT TO CREATE A FRAMEWORK TO ACCESS FOREIGN CAPITAL’

On the launch of the India International Exchange (India INX)
We will trade oil, gold, commodities, and currencies — whatever is allowed in international markets will be traded on this exchange much like London or Dubai and other international exchanges. The exchange will function in a separate jurisdiction much like Hong Kong and China, which is one country with two systems. The International Finance Services Centre has several benefits, designed to attract foreign investors to come trade in India.

On the products that will be traded
We have applied to Sebi for derivatives trading because they are easy to trade and easy to settle. We could be trading derivatives of Apple futures and of many other companies. In case of depository receipts, we have to create depositories in the second phase. We plan to list masala bonds, and also allow fund raising for foreign companies. So, if an Indonesian company wants to raise funds in yen, the exchange should be able to provide the platform over time.

On brokers signing up
There are many brokers of Indian origin who will be trading in those products. We have nearly 94 brokers that have set up companies. There are many brokers of foreign origin who may want to come here for the skills available here.

On additional investment in the Exchange
Over three years, Rs 500 crore will be invested, of which around Rs 100 crore will be liquid capital, and Rs 300 crore kept as capital with clearing houses. For day-to-day operations, software premises and other expenditure, we have earmarked another Rs 100 crore over the next few years.

On the systems at India INX
We had to create a system capable of handling large orders. Starting afresh gives you access to the latest technology. India INX is the fastest in the world now, a trade being completed in four micro-seconds. We have built a data centre in Gift City and in Mumbai.

On competition for BSE
One way we can try to protect our turf. The other way, we can create a framework for the world. So, we decided not to worry too much about being a large fish in a small pond. Instead, we want to create a framework which would allow India to raise global funds.

On who are allowed to trade and invest
Resident Indians are not allowed to trade and invest here; but foreign investors registered with SEBI automatically qualify. Non-resident Indians can also do so. The settlement of the exchange would largely be in dollars.

Gift City’s Signature
India INX is housed in a special part of Gift City, Gandhinagar, Gujarat, and is governed by separate laws so as to provide seamless integration of the India INX with the global finance community. The construction of India’s First International Financial Services Centre called Hiranandani Signature was completed in a record 11 months by Hiranandani Community.

Says Niranjan Hiranandani, CMD, “This centre has come up in record time because of the dreams of Prime Minister Narendra Modi. Everybody told me not to take up a project in the SEZ, but I looked at the plans and felt that I should take the plunge, come what may.”

In the next few months, the International Financial Services Centre (IFSC) is planning to rope in large global re-insurance companies, banks (domestic and foreign) and other financial intermediaries which would provide many financial services to global markets from India, Besides, it is planning to attract top investment dollars to the country.

Businesses housed in the IFSC is exempt from many Indian and local taxes. MAT is applicable at a reduced rate of nine per cent as against 18.5 per cent across the country.