India's Attack on Offshore Markets Clobbers SGX, Risks MSCI Ire
Singapore Exchange Ltd. stock fell the most since November 2008 in early trading Monday.
(Bloomberg) -- A shock decision by Indian exchanges to cut ties with their offshore counterparts sent shares of Singapore Exchange Ltd. 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., together with other Indian markets, said on Friday night that they would end all licensing agreements with foreign bourses and stop offering live prices to overseas venues. The steps will make it impossible for SGX to keep its derivatives based on India’s benchmark Nifty 50 Index, 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 Prime Minister Narendra Modi’s home state. But 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 dollars in assets, and mainland 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, the matter remains unresolved. MSCI didn’t immediately reply to an email seeking comment.
Offshore Hub
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 stock was down 7 percent at 3 p.m. local time.
The NSE decision could mean a cut of at least a 4 percent to SGX’s total revenue, said Sharnie Wong, a Bloomberg Intelligence senior industry analyst. 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 BI’s estimate.
India’s move came after SGX launched single-stock India futures on Feb. 5. 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 won’t impact the Indian single-stock futures, which aren’t based on licensed market data from the Indian exchanges, DBS Group Research analyst Sue Lin Lim wrote in a note, citing SGX. The exchange declined to comment.
SGX sought to defuse tensions on Sunday with a statement that said it will work with NSE “toward solutions for global investors.” It also noted 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 won’t have a material impact on its “immediate” financial results, SGX also said.
“Right Thing”
Vikram Limaye, chief executive officer of NSE, India’s biggest bourse, defended the motives behind Friday’s announcement.
“We are not being protectionist,” he said in a phone interview. “We are doing what is good for Indian markets -- and fragmenting liquidity is not.”
The Nifty 50 index climbed 0.6 percent on Monday amid a rally in Asian shares.
SGX isn’t the only overseas exchange affected by Friday’s move. NSE will also end its licensing arrangements with CME Group Inc., the Taiwan Futures Exchange and Osaka Securities Exchange, CEO 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.
--With assistance from Divya Balji and Abhishek Vishnoi
To contact the reporters on this story: Andrea Tan in Singapore at atan17@bloomberg.net, Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net.
To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Michael Patterson
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