Is A Merger Of Two IFSC Stock Exchanges On The Horizon?
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 as details are not public. 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 the 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, the 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 unprofitable. 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 the 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 the authority, Siddharth Shah, partner at Khaitan & Co. told BQ Prime. These may require the IFSC Authority to approve and provide necessary guidance for the merger. In the domestic market, the SCRA and SEBI guidelines would govern the recognised stock exchanges. Since the IFSC authority has been empowered to regulate entities in international finance centres, it will be the sole authority to regulate the exchanges organised in the IFSC including any corporate reorganisations, said Shah.
The IFSC is a deemed foreign territory and regulations have to be governed by IFSC authority, said Shah.
Though the merger regulations for stock exchanges are yet to be formulated, the 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 the 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?
Several carve-outs under the Companies Act have been made for entities incorporated in GIFT with a view to make the regime comparable to other international financial centres globally. But for the merger process, 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 the NCLT process could be dispensed, said Shah of Khaitan. If the central government decides to exercises these powers, then there may be a way for GIFT entities holding the exchange licence to avoid going through the NCLT process, said Shah, adding that if so, it can be undertaken through an administrative process with the Registrar of Companies, subjected to IFSC Authority giving the approval to merge.
If you look at it, we are the first exchange to come to IFSC and named Indian International Exchange. I think the question should be put up to the other exchange. They could have partnered with us also. We are open to that, we are open to any partnership with other exchanges also. But it is finally up to the policymakers to look at it. Whether they want a unified single exchange in GIFT IFSC competing with the rest of the exchanges in the world or they want to look at a pro-competition policy which is there. It is totally up to the regulators but we are open to the idea.V Balasubramaniam, Managing Director and Chief Executive Officer, India INX (IFSC arm of BSE)
Not just for the exchanges, it is also in the interest of stock brokers to get a unified trading platform. A combined trading platform will conserve capital for the brokers and avoid confusion on which exchange to select.
Globally, except for the United States, all major trading markets that attract global funds have one exchange platform to attract liquidity, said a senior NSE executive on the condition of anonymity. At the IFSC, it should be one front like we have in bullion exchange, the executive said.
The Singapore Connect can be expanded to get liquidity across various trading segments like currency derivatives, and green bonds. It is now up to the three regulators—RBI, SEBI, and IFSCA—to push this idea.
ABOUT THE AUTHOR(S)