The decision of Securities and Exchange Board of India(Sebi) to allow ‘omnibus’ trade structures at Gujarat International Finance Tec-city (Gift City), India’s first international financial services centre(IFSC), has brought cheer among offshore investors.
Curbs imposed on participatory notes (p-notes) last year had restricted participation of overseas investors in the domestic derivatives market. These investors will be to resume their trading without having to apply for a foreign portfolio investor (FPI) license, experts say.
“This is a big step towards enhancing liquidity in the IFSC market. It will result in a win-win situation for all. P-note investors, who were barred from accessing Indian derivatives market, unless directly registered as FPI, will have something to cheer about. They will now be able to access Indian stock derivatives in IFSC without worrying about the hassle of KYC requirements. Prime brokers issuing p-notes who have been on the receiving end of the regulations for quite some time will finally have something to look forward to,” said Suresh Swamy, Partner, PwC.
The centre currently witnesses an average daily turnover of $300-360 million. Experts say volumes could easily double in the near future.
Market participants say allowing omnibus structures will also help Gift city in attracting more inflows.
There are already several benefits for investors trading out of Gift City. Tax sops such as exemption from capital gains, securities transactional tax (STT) and stamp duty are already applicable for trades coming from Gift. As a part of improving ease of doing business, the central government has proposed a single unified regulator for Gift City.
To prevent export of Indian markets to offshore destinations such as Singapore has prompted Indian government to set up this financial centre.
However, allowing omnibus trading could also lead to creation of opaque structures, warn legal experts. While Sebi has asked brokers to collect the know your customer (KYC) documentation from all the investors and comply with the anti-money laundering, globally omnibus structures are considered prone to misuse.
“Transparency is a key issue in such structures especially given our experience with instruments such as p-notes. In segregated accounts, the broker or providers buys the securities on behalf of his clients and hence all purchases will be under the broker’s name. Hence, the details of actual investors will remain anonymous,” said Tejesh Chitlangi, partner, IC Universal Legal.
Gift City has been designed on the lines of Singapore or Dubai. Through the facility, investors trade in both Indian derivatives as well as global derivatives. Currently, exchanges at Gift City offer derivative contracts for some US-listed companies such as Apple and Facebook.
Following the tightening of the p-note framework there has been an exodus of investors from the derivative instruments. The notional value of p-note investments in Indian derivatives fell from Rs 470 billion in May 2017 to Rs 82 billion in July 2017, immediately post tightening. It has further come down to Rs 37 billion at the end of March 2018.
Investors who exited Indian markets due to the curbs can now trade in Indian derivatives by investing through a service provider or broker present at Gift City.