Dollar settlements for FIIs on cards

Move aimed at bringing more FII investments into domestic market.

The Securities and Exchange Board of India (Sebi) is in talks with the Reserve Bank of India (RBI) to consider a proposal to permit dollar settlements for foreign institutional investors (FIIs) in India. The move would mean a tectonic shift in the way FIIs invest in Indian markets. Dollar settlements would not only mitigate risks of currency fluctuations for FIIs, but also help in improving the volume and liquidity of the derivatives market.

At present, settlements in India are done in rupee denominations. As a result, a number of FIIs, who intend to trade in Nifty futures, take the Singapore route where CNX Nifty index futures are traded on SGX.

If dollar settlement is allowed in India, many participants, who want to take exposure to Indian markets through index buying, will be able to participate freely. This, in turn, will give stability to Indian markets as there will be buying of underlying stocks by the sellers of these contracts to FIIs.

Sources close to the development said that it was a consultative process between RBI and Sebi and that it was difficult to fix a time frame as to when guidelines on this would be issued.

RBI has formed a committee to discuss the issue. Apart from senior RBI officials, this committee includes a top Sebi executive.

“A large volume of Nifty contracts are traded on the SGX. One of the biggest reasons of this is that FIIs enjoy the benefit of dollar settlements there. This helps them stay away from risks of currency conversion,” said Anup Bagchi, executive director of ICICI Securities.

About 50 per cent of the total open interest (OI) build-up in Nifty futures takes place on the SGX. OI refers to derivative contracts that have not been squared off. Singapore allows settlements in three currencies — Singapore dollar, Hong Kong dollar and US dollar. This enables different types of FIIs to operate there.

Low transaction costs of only 3-4 basis points in the absence of securities transaction tax, stamp duty and P-note complications have resulted in a gradual shift of FIIs into offshore markets. Market experts feel that settlements in dollar would also help in reducing the volatility in dollar-rupee conversion value caused due to FII flows.

Each time a settlement is done, a seller of futures contracts to an FII would buy an equivalent amount of underlying stocks to hedge his/her exposure due to the sale. This would increase the trading volume and liquidity of Indian markets, once dollar settlement is allowed.

“Getting settlements in dollar will expedite the process of FII money flowing into India. But since the transaction costs are high in India as compared to other countries, we first need to minimise these costs or standardise them to attract FIIs,” said Sudip Bandyopadhyay, managing director of Reliance Money.

FIIs take the equity risk as well as currency risk while trading in equities and derivatives. “It might be a good idea to have dollar settlement in India to prevent offshoring of our markets. FII registration process has improved, and if transaction costs are lowered, there is every possibility of bringing in more FII volumes to the country. Additionally, bringing more overseas products into India for hedging purposes can create a whole new opportunity,” added Bagchi.