Alone we can do so little; together we can do so much," said Helen Keller. About a year ago, who would have thought the National Stock Exchange (NSE) and the Singapore Exchange (SGX) would be in agreement with Keller, leave alone each other. Back then, they were in dispute about an earlier partnership, after NSE abruptly decided to end a licensing arrangement that allowed SGX to trade Nifty futures on its own platform.

But much water has flown under the bridge since then. The two exchanges have been working hard on a proposed India-Singapore Connect that aims to bring together the trading of Nifty products on NSE’s venture at Gujarat International Finance Tec-City (GIFT City) and SGX, to create a larger pool of liquidity. Earlier this month, the two exchanges said they had obtained the support of their statutory regulators for the proposed Connect.

The new partnership is sparking much optimism. “This is a great opportunity to build vibrant markets in GIFT City," Vikram Limaye, managing director and CEO of NSE said in a statement on the Connect. “We are committed to collaborating with NSE and other stakeholders to build connectivity and access to one of the fastest growing economies in the world," said Loh Boon Chye, CEO of SGX.

But, to say the least, this is an intriguing experiment in the history of India’s capital markets. It’s not so much the strength of the partnership that’s in question, but India’s antagonistic approach towards foreign flows in general. At the time when NSE and SGX were going to town about the proposed Connect, foreign portfolio investors were protesting a provision in the Union budget that suddenly increased taxes for some categories of investors.

Almost simultaneously, Citibank and some other investors were petitioning Securities and Exchange Board of India to quickly rule on a matter that had held up the settlement of certain Nifty options trades on NSE’s main exchange in Mumbai. A number of trading firms have been hung out to dry, with no sign of the funds they were supposed to receive from the Nifty options trade. This raises serious questions about the efficacy of India’s settlement infrastructure.

From a foreign investor’s perspective, these are one too many concerns when it comes to trading in the Indian markets. In the past, there were worries surrounding the government’s general anti-avoidance rules (GAAR), an anti-tax avoidance law. This column has also highlighted the foolhardy attempt by Sebi to make participatory notes irrelevant, since it signalled that flows from legitimate investors who don’t want to register directly with Sebi didn’t matter. And while a government-appointed committee approved the listing of unsponsored depository receipts years ago, the project remains a non-starter.

In short, foreign flows are welcome only through certain sanitized routes to India, and if the GIFT Connect follows similar hygiene factors, it shouldn’t be surprising if foreign investors choose to stay away altogether. “I wouldn’t be surprised if a parallel over-the-counter market develops in centres such as Singapore," says an expert in market microstructure. This concern stems from the history of arbitrary regulatory decisions by Indian authorities, and its influence on the behaviour of certain foreign market participants who prefer to keep an arm’s length.

While Sebi has given approved regulatory dispensations for the Connect to work, the project is very much still work-in-progress. Given the number of approvals needed for SGX to set up shop in GIFT, besides other formalities, the two exchanges said they are working towards getting it operational before the end of 2020.

There are some imponderables to reckon with as well. Thus far, there is almost zero experience of an overseas trading firm interacting with the existing trading venues in GIFT City. As such, the NSE-SGX Connect would need to calm many nerves before foreign firms begin to use the new facility. Besides, the government has announced the setting up of a unified regulator for the international financial services centre (IFSC) in GIFT, although this is yet to be made operational. Unless there is clarity on the powers and discretions of this new regulator, firms may be reluctant to sign up as well.

But, as Keller also said, “Life is either a daring adventure, or nothing." NSE and SGX must be commended for attempting to, as it were, land on the moon. If only India’s policymakers, too, played their part with consistency.


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