The launch of the India International Bullion Exchange at GIFT City, the nation’s first international financial services centre, heralds the consolidation of an Indian capital markets platform to tap global liquidity.
This has prompted questions about whether the stock exchanges that compete for the same liquidity pool should be merged?
The IIBX has been created by the country’s three stock exchanges and two clearing corporations–BSE through its IFSC arms (India INX and INX Clearing Corporation), the National Stock Exchange of India, the Multi Commodity Exchange, and National Securities Depository Ltd. as well as Central Depository Services Ltd.
All five market institutions hold 20% each in the bullion exchange, which will allow certified large jewellers to import gold directly into the country instead of channelling it through banks and authorised agencies.
A similar initiative is now being explored in equity trading, a senior official at the International Financial Services Centres Authority said on the condition of anonymity. These are initial talks, and there is no certainty it will fructify, he said.
The launch of the NSE IFSC SGX Connect has already brought to the hub the attention of global investors that can now trade in Nifty derivatives products at IFSC. Now, could this launch trigger consolidation of stock exchanges in the IFSC? The idea, which is in an initial phase, has a great many hoops to jump through but it is worth considering, said the senior official cited earlier.
In order to move the ball forward, IFSCA would initiate discussions with stakeholders to integrate their equity trading platform and jointly offer it to global investors. An integrated equity platform can also provide other products beyond the futures contract connect such as currency derivatives to investors in Singapore, which is a big offshore market for dollar-rupee derivative trades and a big market for non-deliverable forwards.
In addition to bringing offshore liquidity for Indian products to India, such consolidation could also bring cost efficiency and capital conservation for the stock exchanges that are currently capitalising their IFSC subsidiaries to bring in volumes via liquidity enhancement schemes. Nearly five years since their launch in IFSC, the stock exchange subsidiaries are loss-making. While over a hundred brokers may have set up offices, hundreds of others are on the sidelines unable to make a decision on whether to make investments.
The stock exchanges realised that they were targeting the same liquidity pool, the same brokers and the same foreign institutions. They also know that if IFSC needs to be projected as a gateway to the Indian financial markets, they need to provide a unified trading platform to investors and prevent the splintering of the liquidity pool that is coming into India.
These are entities under the IFSC regime so they will be governed by regulations of IFSC authority, said Siddharth Shah, Partner, Khaitan & Co. to BQPrime. These may require IFSC Authority to approve and provide necessary guidance for the merger. In the domestic market, SCRA and SEBI guidelines would govern the recognised stock exchanges. Since IFSC authority has been empowered to regulate entities in IFSCs, it will be the sole authority to regulate the exchanges organised in IFSC including any corporate reorganisations, said Shah.
IFSC is a deemed foreign territory and regulations have to be governed by IFSC authority only, said Shah.
Though the merger regulations for stock exchanges are yet to be formulated, IFSCA doesn’t see this as an issue, said a senior official. The exchanges are incorporated under the Companies Act, 2013, and an administrative mechanism through the Ministry of Corporate Affairs can be put in place to facilitate the merger of the two stock exchanges operating in IFSC. The question is will the two exchanges be open to such an idea and whether policymakers are willing to put their weight behind it.
While several carve outs under companies act have been made for entities incorporated in GIFT with a view to make the regime comparable to other international financial centers globally. But for the merger process unfortunately no specific carve out has been made. And the merger of two GIFT entities may need to follow the normal NCLT process. However, the companies act empowers the central government to notify certain categories of mergers under the ‘fast track’ route whereby NCLT process could be dispensed said Shah of Khaitan. If central government decides to exercises these powers, then there may be a way for the GIFT entities holding the exchange license to avoid going through the NCLT process, said Shah, adding, if so it can be undertaken through an administrative process with the RoC, subjected to IFSC Authority giving the approval to merge.