Pedestrians cross a road in the central business district of Singapore. (Photographer: Sam Kang Li/Bloomberg)

Why India's Offshore Clampdown Irks Global Markets

(Bloomberg) -- India’s three national exchanges stunned the investing world on a Friday night in February when they jointly announced they were going to cut ties with their foreign counterparts. This was effectively an attack on offshore hubs like Singapore and Dubai and raised questions about how India fits in with global finance. Investors warned that the standing of one of the world’s biggest emerging markets in global indexes could be in jeopardy.

1. What prompted India’s move?

Like many other Asian nations, India is trying to find ways to maximize trading at home and limit the outward flow of money across its border. India is also trying to boost trading in a tax-free zone known as Gift City, which was built in Gujarat, the home state of Prime Minister Narendra Modi.

2. What exactly did India do?

On Feb. 9, the National Stock Exchange of India Ltd., BSE Ltd. and MSEI Ltd. ended overseas licensing deals, meaning they’ll no longer share live prices with foreign venues. That makes it tough for the Singapore Exchange Ltd. and other bourses to maintain flagship products that are linked to Indian indexes. SGX shares plunged after India’s actions. In another ratcheting up of tensions, India’s NSE sued Singapore’s SGX in May to halt its planned launch of futures contracts.

3. What’s been the reaction?

Exchanges including futures trading giant CME Group Inc., Eurex Group and Osaka Exchange said they would stop offering India equity derivatives. For India, its standing in the popular MSCI Inc. indexes may be at stake. New York-based MSCI’s benchmarks are tracked by funds with trillions of dollars in assets, and it lambasted India’s move as anti-competitive. NSE’s chief executive officer told MSCI to keep out of the dispute. In July, Indian and Singaporean regulators intervened, telling both SGX and NSE to come up with an amicable resolution. This led to a revival of on-again, off-again talks about a trading link between Singapore and Gujarat.

4. Why does this matter?

Foreign investors use futures contracts listed in hubs such as Singapore, Dubai, Osaka and Chicago to hedge their investments in trickier emerging markets like India. Cutting off these alternative platforms risks choking capital flows for bourses like the SGX as well as potentially curbing liquidity for India’s $2.2 trillion stock market if an alternative hedging route isn’t provided.

5. What other nations are taking steps like this?

China, Indonesia and Malaysia, which still remember how unfettered capitalism sunk their economies about 20 years ago, have also taken steps to keep control of inflows even as they court global investors. China’s $7.6 trillion equity market is largely off-limits to global funds; Malaysia’s central bank warned against betting on the ringgit, a non-internationalized currency, in offshore markets. The reluctance to cede control is creating tension with international investors and their governments, who are keen to profit from some of the world’s fastest-growing economies.

6. What’s the future for investors looking to trade?

Trading links, like the one still being contemplated by the India and Singapore exchanges, may hold the key for countries looking to increase global business but retain control of trading. (Under the India-Singapore link, buy and sell orders from SGX’s customers would be routed to NSE’s IFSC Ltd. exchange.) Two stock connects with Hong Kong, which have daily trading quotas, offer investors a way into China’s market. A Shanghai-London trading link is in the works.

The Reference Shelf

  • Asian countries want to be open to the world, but on their terms.
  • India is begging to be punished by MSCI, writes Bloomberg Opinion columnist Andy Mukherjee.
  • A QuickTake explainer on capital controls.

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