World Markets

An international dispute about a popular investment product could shape India's market

Key Points
  • The Singapore Exchange (SGX) and National Stock Exchange of India (NSE) are engaged in arbitration proceedings over the planned listing of a derivative product.
  • The NSE and other Indian stock exchanges said in February that they would be ending licensing agreements for overseas exchanges. That's creating uncertainty for those who engage in offshore trading as a way of hedging the Indian market.
  • The dispute has cast doubts on a popular investment product, and it has raised questions about the future of India’s large equity market.
A guard walks past the National Stock Exchange building in Mumbai, India, on February 9, 2018.
Danish Siddiqui | Reuters 

A dispute between stock exchanges in India and Singapore has cast doubts on a popular investment product, and it has raised questions about the future of India’s more than $2 trillion equity market.

While the problem — a disagreement about the planned listing of a derivative product — may appear to be a niche one, it potentially affects a large swath of international investors with an interest in India.

The dispute

The contract at the heart of the dispute is the Nifty 50 index futures contract currently traded on the Singapore Exchange. According to industry players, that's one of the primary ways that investors around the world have been able to play the Indian market.

The derivative product in Singapore is "the incumbent, the largest and most liquid" of futures contracts on offer, Ross Finlayson, on the iShares capital markets team at BlackRock, told CNBC.

The National Stock Exchange of India has been providing data to the Singapore Exchange for the derivative product, which is used by offshore investors looking to hedge exposure to the Indian stock market. At present, many regard Indian equities as difficult to access because of the country's tax rules and other roadblocks.

Now, that contract in Singapore is set to go away following an announcement from the NSE and two other Indian exchanges that they would be ending agreements to provide market data to overseas exchanges. That would affect the trading of offshore derivatives, including the SGX's Nifty 50 Index Futures.

The NSE said the move was needed as derivative trading based on Indian securities had resulted in capital migrating offshore. That was “not in the best interest of Indian markets,” the NSE said in a release.

Following the announcement, the SGX said it would list newly created Indian derivative products, but its plans were dealt a blow by the NSE, which took the dispute to court. That was because the proposal was seen as identical to the incumbent SGX Nifty futures, local media outlet The Times of India said, citing sources.

For now, the issue remains in a holding patter. An Indian court last month ordered the NSE to extend the existing license for SGX Nifty futures for at least two successive contract months after arbitration — which the Indian stock exchange said is expected in February 2019 — is completed.

Both the SGX and NSE told CNBC they had no additional updates on the matter beyond statements released last month.


Investors have been left with plenty of uncertainty in the wake of those developments. Interest in Nifty futures on the SGX has tapered: Volumes of the derivative traded on the SGX have slipped from above the 2 million mark per month to consistently coming in below that level from March onward.

The dispute makes things difficult for investors trying to get exposure to Indian equities, thus potentially increasing costs for those looking to access the Indian market, said Zhikai Chen, a Hong Kong-based portfolio director at Lombard Odier.

And even though the NSE's existing license has been prolonged for now, investors are unlikely to wait until the last moment before scrambling for alternatives in the scenario the arbitrator rules in the Indian stock exchange's favor. That's because India has a roughly 8.5 percent weighting in the MSCI Emerging Markets Index and those tracking that benchmark need to ensure they have exposure to the Indian market.

"From one day to the next, it's very difficult for these managers to be sitting in a limbo as to whether they know they can access that exposure," Finlayson said.

There aren't too many alternatives that investors caught in the middle can turn to for now, Finlayson said, citing other smaller futures contracts and less liquid derivatives as examples of options. He added that interest in one of BlackRock's recently launched exchange-traded funds focusing on Indian equities had spiked since the two exchanges began legal proceedings.

“Because of this turbulence in the market, no one’s really too sure as to the viability of this new product and the overhanging court proceedings obviously bring it a little more into disrepute as well,” Finlayson said of the new India stock futures the SGX plans to launch.

Another potential casualty could be the onshore Indian equity market as liquidity could take a knock if arbitrage trading between the two stock exchanges is affected by SGX Nifty futures being halted, said Dbritto Ronald Michael, senior development manager at brokerage Phillip Futures.

All of that also comes against the backdrop of the development of the Gujarat International Finance-Tec (GIFT) City, a district in Gujarat state positioned by the Indian government as a high-tech hub for financial services. Concessions, such as exemptions from short-term capital gains taxes on derivative trades made in GIFT City for foreigners, are being made to encourage offshore trading volumes to return onshore.