Mumbai: Asia’s oldest bourse, Bombay Stock Exchange Ltd (BSE), is set to sue Singapore Exchange Ltd (SGX) for launching Nifty options, allegedly breaching the terms of an agreement through which SGX acquired a 5% stake in BSE in 2007.
Two persons familiar with the development told Mint that the agreement between BSE and SGX does not permit the latter to launch or trade futures or options based on any other Indian bourse (apart from the Nifty futures trading from before the pact was signed).
According to them, it was illegal on the part of SGX to strike a deal with BSE rival National Stock Exchange of India Ltd (NSE) to launch equity options based on the S&P CNX Nifty—the 50-stock benchmark index of NSE.
“BSE will file a suit against SGX with the Bombay high court shortly,” said one of the persons on condition of anonymity.
An email sent to the address listed on the SGX website for media contacts at 2pm India time did not elicit a response. Both BSE and NSE spokespersons declined to comment for the story.
Options based on the S&P CNX Nifty are set for a debut on SGX in February. In December, SGX circulated a consultation paper on its website seeking public feedback for launching Nifty options. These options are the most widely traded index derivatives in India, and NSE, for the past few months, has been trying to launch these contracts on exchanges abroad. If the deal between NSE and SGX goes through, it will be the first time these products are traded overseas. This will boost the revenue of NSE further at a time when BSE is losing market share to the bourse.
“The agreement between SGX and BSE was signed as per Indian laws, and hence a legal case can be initiated in an Indian court only. BSE is in the process of hiring a legal counsel to file a petition against SGX,” added the person.
In 2007, SGX had signed a five-year agreement with BSE, thereby picking up a 5% stake for at least Rs220 crore. India’s capital market regulations permit a maximum of 5% shareholding in a stock exchange by any foreign institutional investor or exchange.
“As per the terms of the agreement, even after terminating the agreement, SGX cannot launch any Indian index-derivative contract for the three subsequent years. SGX is allowed to trade Nifty futures during the tenure of the agreement. If the agreement is terminated, SGX can trade Nifty futures for three more years following the termination of the agreement,” said another person familiar with the agreement terms between BSE and SGX.
The only Indian derivative product traded on the Singapore-based exchange till date are Nifty futures. None of the products based on the Sensex (the 30-share benchmark index of BSE) has been launched on SGX. While signing the agreement, although both the exchanges had announced their intention to mutually promote each other’s products and explore further collaboration in terms of listings, nothing meaningful has happened so far. Instead, SGX has not only refrained from launching any BSE product, but also gave up its BSE board membership in 2009. Contrary to the spirit of the agreement with BSE, SGX has begun talks with NSE to promote and launch various NSE-traded products.
SGX is in the process of taking over Sydney-based stock exchange giant ASX Ltd for at least $8.3 billion (Rs37,765 crore). This would create the fifth largest bourse in the world. The world’s top exchange operator by market value is Hong Kong Exchanges and Clearing Ltd.
“A suit against SGX by BSE may not only delay the process of this takeover, but also raise serious questions on ethics and principles followed by SGX with its existing partners. This in turn may affect the future tie-ups envisaged by SGX,” said the second person, who declined to be identified.
“These are matters of contract and are usually confidential. It is too tricky for anyone to comment without actually going through the contract,” said a senior corporate lawyer.
According to a person familiar with the SGX-NSE pact, the introduction of Nifty options is done under the earlier agreement under which the Nifty index has been licensed to SGX. The recent investment by SGX in BSE will not have retrospective effect, the person added.
BSE and NSE have been fighting over market share. NSE enjoys a monopoly in equity derivatives in India. During January-December 2010, futures worth Rs7.98 trillion and options worth Rs13.03 trillion were traded on NSE, with almost the entire volume coming from Nifty options in the equity options segment. In January 2011 alone, Nifty options worth Rs1.01 trillion have been traded so far.
The SGX S&P CNX Nifty index future is one of the top traded derivatives on SGX. In December 2010, 865,769 Nifty futures were traded on SGX. As per Tuesday’s close of the Nifty at 5,724, one SGX S&P CNX Nifty Index future would be worth $11,448.
In its race with NSE, BSE, too, has been trying to launch Sensex on global exchanges. Last year, Deutsche Börse AG, which also holds a 5% stake in BSE, launched the Sensex on one of its platforms called Eurex. However, the product is yet to gain sufficient volumes.
Ashwin Ramarathinam also contributed to this story.