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April 11, 2015

SEBI clears the way for setting up of International Exchanges

 

Stock exchange market regulator SEBI has come out with regulations permitting IFSC and simplifying trading in securities which will also include currency and index derivatives contracts.
GIFT City in Gujarat, India is on the brink of establishing an international stock market which will enable companies to trade in equities of companies having international presence. The international exchanges being proposed will allow investors to bet on the different currencies of the world as also take a directional call of the sovereign yields of various Governments. The geographical barrier hitherto which was a deterrent to the enthusiastic investors who wanted to take their next step to world exchanges is all set to be demolished once the International Exchanges start their operations in GIFT City.
In its attempt to liberalize the economy and to allow investors to take a global bet, Govt. of India proposed the setting up of IFSC in the Union Budget of 2015. To enable the Government’s objective, SEBI has also issued guidelines which will govern trading in securities in the IFSC at GIFT City.
GIFT City has been given the status of an IFSC with its own set of rules, laws, bye-laws and taxation policies which will enable the national and foreign financial companies to commence their operations in GIFT City and undertake business with the other foreign or domestic companies established in IFSC. GIFT City is planning to compete with the globally established IFSCs like Dubai, Tokyo, Shanghai, Paris and London.
An IFSC in India can help the Indian economy in multiple ways. As the international fund managers with their expertise establish their operations in India, their acquaintance with the Indian economy and the growth of MSME companies is bound to take place. The international fund managers will ensure easy access to capital and required funds from the global investors in time of need for the Indian companies. The IFSC will result in the mass creation of jobs ultimately helping the Indian economy. GIFT City plans to create approximately 1 million jobs once the companies start their operations in GIFT City.
Benefits to the Indian residents
The securities listed on IFSC will be traded in currency other than Indian rupee. A resident Indian will be able to invest and trade in the securities listed on the exchanges at IFSC. This investment will be under the Liberalised Remittance Scheme of RBI which allows spending of USD 250,000 for a year. Indian companies can trade and invest in IFSC exchanges under the prevalent FEMA rules.
The Infrastructure
Stock Exchanges in IFSC can be set-up by an Indian or a foreign stock exchange. The interested exchanges will need to set-up a subsidiary company and should hold at least 51% stake, remaining stake can be held by other recognised stock exchange. The initial net worth of an exchange should be atleast INR 2.5 billion, which should be increased gradually to INR 10 billion over the next 3 years.
Similar set of rules have been formulated for the depositories and the clearing corporations which are an important part of the Stock Exchanges offering them the ancillary services. These institutions have to abide by the broad guidelines on governance as per the International Organisation of Securities Commissions (IOSCO).
BSE and NSE have already entered into a MoU with GIFT City for setting up of an exchange. Since there is no bar on the number of exchanges, it is expected that the foreign exchanges may also set up their operations at GIFT City. SEBI with its limited resources will require a sustained and regular watch on these exchanges in order to ensure compliances with the regulations.
Modes of investment
SEBI has proposed an indicative list of securities which will be allowed for trading in the IFSC exchanges. The concerned companies will have to decide on other factors of trade like the minimum lot size of the security and the tick size of the price. Foreign companies will be permitted to list their equity in the IFSC exchanges and these may lead to some global giants to come for listing at GIFT City keeping in mind the consumers in India. For Indian companies, this will be like listing on International Exchanges like NYSE or LSE and so it will have to issue depository receipts in the same way as ADRs and GDRs.
Investors can have the choice of investing in bonds and debentures of both Indian and foreign companies. It will also provide them an option of currency derivative trading and other globally prevalent derivatives.

 

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