A shock decision by Indian exchanges to cut ties with their offshore counterparts sent shares of Singapore Exchange Ltd (SGX) falling by the most in nine years and raised questions about how the world’s second-most populous nation will fit in with the global financial system.
The National Stock Exchange of India Ltd (NSE), together with other Indian markets, on Friday night said that they would end all licensing agreements with foreign bourses and stop offering live prices to overseas venues.
The steps are to make it impossible for SGX to keep its derivatives based on India’s benchmark NIFTY 50, which are among its flagship products.
The move is the latest attempt by India to discourage offshore markets as it promotes a tax-free trading zone in Indian Prime Minister Narendra Modi’s home state.
However, it could jeopardize India’s standing with international investors and prompt index compilers, such as MSCI Inc, to reconsider the nation’s weighting in global benchmarks, said Johan Sulaeman, research director at the Center for Asset Management Research & Investments at the National University of Singapore’s Business School.
“This will hurt the feasibility of investors, especially the index funds who may prefer to use derivatives, to access the Indian markets,” he said. “I’m sure MSCI and its competitors will be hearing from the funds on how access is being hampered.”
China’s unwillingness to do licensing deals with offshore markets was for years a sticking point between New York-based MSCI, which manages gauges tracked by funds with trillions of US dollars in assets, and Chinese authorities.
The issue contributed to the index compiler repeatedly refusing to add the world’s second-biggest stock market to its international benchmarks. While approval finally came in June last year, the matter remains unresolved.
MSCI did not immediately reply to an e-mail seeking comment.
Singapore has become a hub of offshore trading for many markets, including China, Japan and Indonesia.
Several analyst notes were published after India’s announcement, with at least three banks cutting their rating on SGX’s stock.
The company’s shares fell as much as 8.8 percent in early trading, the biggest decline since November 2008.
The NSE decision could mean a cut of at least a 4 percent to SGX’s total revenue, Bloomberg Intelligence senior industry analyst Sharnie Wong said.
NIFTY-related products at the bourse accounted for about 10 percent of its total derivatives revenue in the first half of its fiscal year, based on Bloomberg Intelligence’s estimate.
India’s move came after SGX launched single-stock India futures on Monday last week.
NSE officials had sought a delay of those products, people familiar with the matter said last month.
“Probably as individual stock futures were being introduced on SGX, the Indian side became paranoid and hence this knee-jerk reaction,” said A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte in Singapore.
The weekend’s developments will not affect the Indian single-stock futures, which are not based on licensed market data from the Indian exchanges, DBS Group Research analyst Sue Lin Lim wrote in a note, citing SGX.
SGX on Sunday sought to defuse tensions with a statement that said it will work with NSE “toward solutions for global investors.”
It also said that the two companies’ partnership goes back to 2000 and that they had collaborated “to develop and internationalize India’s capital markets.”
The NSE move will not have a material impact on its “immediate” financial results, SGX also said.
NSE chief executive officer Vikram Limaye defended the motives behind Friday’s announcement.
“We are not being protectionist,” he said in a telephone interview. “We are doing what is good for Indian markets — and fragmenting liquidity is not.”
The NIFTY 50 yesterday climbed 0.6 percent amid a rally in Asian shares.
SGX isn’t the only overseas exchange affected by Friday’s move.
NSE, India’s biggest bourse, would also end its licensing arrangements with the Taiwan Futures Exchange, CME Group Inc and Osaka Securities Exchange, Limaye said.
“At a time when China is working hard for inclusion in MSCI, and Hong Kong, Singapore and Malaysia continue to work to improve accessibility for international investors, Indian mandarins are still insular in their view believing compelled investors make value,” said Shankar Char, senior vice president at Antique Stock Broking Ltd in Mumbai.
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