MUMBAI – After long failing to act on foreign-investor complaints, Indian policymakers find themselves in an ironic bind: As global interest in Indian derivatives surges, it is Singapore, not Mumbai, that is reaping the benefits.
In a turnaround from past years, more stock futures and options based on India’s main National Stock Exchange Index are traded in Singapore than in India. Billions of dollars in rupee derivatives traded from Singapore nearly equal the amount of spot currency traded in India. Deals in Indian debt derivatives are close to volumes in Indian markets.
The swing shows how deeply a tax gaffe last year damaged foreign-investor sentiment and the cost to an economy that has seen growth tumble to around 5.5 per cent, following the sharpest slowdown in a decade.
In the absence of big changes, particularly on tax, it will be difficult for India to woo investment back when competing with an established international financial centre like Singapore, said fund manager Samir Arora of Helios Capital Management.
Mr Arora said: “There is one big advantage of being here (in Singapore).
“You need investors, and investors pass through Singapore more than they pass through Mumbai.”
Investors have long complained about high taxes on portfolio investment in India, excessive caution towards derivatives and a poor track record in setting up new markets.
And India is now paying the price for poorly-written rules last year aimed at ensnaring tax evaders, including those routing investments through Singapore, which instead sparked outcry among foreign investors and an outflow of funds.
Finance Minister P. Chidambaram, who met foreign investors in Asia and Europe last month, has vowed action to prevent the offshoring of Indian derivatives, although few expect significant announcements in a budget set to be announced today to counter the trend.
He pledged in a speech in Mumbai this month to “find ways and means to bring the options markets back to India, or at least a substantial portion of the options markets back to India”.
Finding those ways and means may be easier said than done.
Singapore is the main centre for trading rupee non-deliverable forwards (NDFs), a type of derivative that allows foreign investors to trade the currencies of countries that restrict access from abroad. They are settled in dollars, so there is no foreign-exchange risk.
Volumes in rupee NDFs rose to a daily average that spans from US$7 billion (S$8.7 billion) to US$8 billion last year, from as low as US$100 million in 2003, traders said, nearly equalling India’s onshore volumes for trading the currency on a spot basis.
What worries India is that Singapore markets are attracting flows in other derivatives, creating not only a missed opportunity for India, but also the risk of a parallel overseas market offering arbitrage opportunities that distort domestic prices.
Singapore’s appeal goes beyond just the type of markets it offers. India demands that new investors deal with a thicket of documentation.
While opening a foreign institutional investment account in most countries takes a few days, it takes up to six weeks in India, said Mr Krishnan Ramachandran, chief executive of Barjeel Geojit Securities in Dubai.
“So the start itself is a hurdle,” Mr Ramachandran said.
The bigger hurdle is India’s more severe taxation. Singapore does not tax capital gains and its tax on interest income allows for certain exemptions, such as foreign-sourced dividends.
India has a 15 per cent short-term capital-gains tax on listed securities. Most domestic- debt instruments carry a 20 per cent tax on income earned, which Mr Jayesh Mehta, India country treasurer at Bank of America in Mumbai, calls the “biggest showstopper”.
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Singapore benefits from India tax gaffe
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