By Subhadip Sircar and Swati Bhat
MUMBAI, Feb 27 (Reuters) - After long failing to act on
foreign investor complaints, Indian policy makers find
themselves in an ironic bind: As global interest in Indian
derivatives surges, it is Singapore, not Mumbai, that is reaping
In a turnaround from past years, more stock futures and
options based on India's main NSE share index are traded
in Singapore than India. Billions of dollars in rupee
derivatives traded from the city state nearly equal the amount
of spot currency traded in India. Deals in Indian debt
derivatives are close to volumes in Indian markets.
The swing shows how deeply a tax gaff last year damaged
foreign investor sentiment and the cost to an economy that has
seen growth tumble to around 5.5 percent following the sharpest
slowdown in a decade.
In the absence of big changes, particularly on tax, it will
be difficult for India to attract the investment back when
competing with an established international financial centre
like Singapore, said fund manager Samir Arora.
"There is one big advantage of being here," Arora, of Helios
Capital Management, said. "You need investors, and investors
pass through Singapore more than they pass through Mumbai."
Investors have long complained of high taxes on portfolio
investment in India, excessive caution towards derivatives and a
poor track record in setting up new markets.
But India is now paying the price for poorly written rules
last year aimed at ensnaring tax evaders, ironically including
those routing investments through Singapore, which instead
sparked outcry among foreign investors and an outflow of funds.
Finance Minister P. Chidambaram, who met foreign investors
in Asia and Europe last month, has vowed action to prevent the
offshoring of Indian derivatives, although few expect
significant announcements in a budget on Thursday to counter the
He pledged in a speech in Mumbai this month to "find ways
and means to bring the options markets back to India, or at
least a substantial portion of options market back to India."
A TALE OF TWO CITIES
Finding those ways and means may be easier said than done.
Singapore is the main centre for trading rupee
non-deliverable forwards, a type of derivative that allow
foreign investors to trade currencies of countries that restrict
access from abroad. They are settled in dollars, so there is no
foreign exchange risk.
Volumes in rupee NDFs rose to a daily average of $7-$8
billion in 2012 from as low as $100 million in 2003, traders
said, nearly equalling India's onshore volumes for trading the
currency on a spot basis.
What worries India is that Singapore markets are now
attracting flows in other derivatives, creating not only a
missed opportunity for India, but also the risk of a parallel
overseas market offering arbitrage opportunities that distort
Singapore's appeal goes beyond just the type of markets it
offers. India demands new investors deal with a thicket of
While opening a foreign institutional investment account in
most countries takes a few days, in India it is up to six weeks,
said Krishnan Ramachandran, chief executive of Barjeel Geojit
Securities in Dubai.
"So the start itself is a hurdle," Ramachandran said.
The bigger hurdle is India's more severe taxation. Singapore
does not tax capital gains and its tax on interest income allows
for certain exemptions, such as foreign-sourced dividends.
India has a 15 percent short-term capital gains tax on
listed securities. Most domestic debt instruments carry a 20
percent tax on income earned, which Jayesh Mehta, India country
treasurer at Bank of America in Mumbai calls the "biggest
India is unlikely to make substantial tax cuts though, as
the government looks to cut its own debt and boost revenues. In
fact it is signalling a more aggressively tax stance by pursuing
claims against multinational firms to try to shore up its
To be sure, foreign portfolio investors are not absent from
India. Net foreign fund inflows into stocks and debt last year
topped $31 billion, the second highest amount on record.
That partly reflected a fall in the rupee to a record
low and relatively high investment yields at a time when most
developed markets offered only paltry returns.
Singapore gained as those investors hedged their India
The split in futures positions between Singapore and India
has shown a clear shift to the city state. In January 2012, the
domestic share of all NSE outstanding contracts was 51 percent,
but last month Singapore accounted for nearly 70 percent of the
share, exchange data shows.
Singapore trading of Indian overnight index swaps - a bet on
the direction of interest rates - has almost caught up to the
volumes in India, traders say, although there is no official
"The problem arises when the offshore market grows in
response to deficiencies in the onshore market," said Jayanth R
Varma, a professor at Indian Institute of Management in
Ahmedabad and a former board member of the Securities and
Exchange Board of India.
"In this case, the offshore market provides a useful warning
signal to policy makers to correct these deficiencies."
(Additional reporting by Rachel Armstrong in SINGAPORE and
Archana Narayanan in MUMBAI; Editing by Rafael Nam and Neil