Proprietary trades drive GIFT City volumes

Most trades by broker members; overseas investor participation yet to take off

Trading volumes at stock exchanges set up at the GIFT City, an international financial services centre (IFSC), are seeing a gradual uptick. But, the bulk of the volumes are on account of proprietary trading by brokers, while participation by overseas investors is yet to take off in a big way.

According to sources, nearly 70 per cent of the volumes at GIFT City are contributed to by the brokers, trying to take advantage of the various incentive schemes and tax exemptions.

“A majority of trades at the exchange are happening through proprietary trades. Most trades are proprietary short-term speculation, enabling risk transfer and hedging for end users," said a person in the know. 

The average daily volumes on the BSE's s India International Exchange (INX) for the past three months have stood at over $50 million. While on some trading sessions, the volumes have even crossed the $100-million mark. NSE IFSC, set up in June, lags BSE in volumes.

For overseas investors, trading cost on global IFSCs is still cheaper, say experts.

"Vision for IFSC was to compete with international stock exchanges like SGX. Foreign investors trading in Indian derivatives listed on SGX are not subject to taxes. If one compares foreign investors investing on SGX vs IFSC exchange, clearly investment on SGX will leave the investor with 30 per cent more net profit because any gain on derivatives traded by foreign investors on IFSC will be subjected to tax at 30 per cent,” said Bhavin Shah, tax leader, PwC India.

Currently, almost half of the equity derivatives volumes on indices such as the Nifty have moved to global centres such as Singapore. The idea behind IFSCs like GIFT City is to get back some of these volumes by providing tax breaks.

“If this (tax issue) is not corrected in time, moving back of volumes from international exchanges will be difficult,” Shah said.

Market players say development of the GIFT IFSC would take time as it is directly competing with established centres such as Singapore and Dubai.

“Any new initiative takes time to attract overseas investors, especially when there is competition with established global financial centres like Singapore. Long-term foreign investors would like to compare the significant differentiation between the two venues while making investment decision,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. 

“GIFT City is conceptualised as a global financial hub on the lines of globally benchmarked financial centres like Singapore, Hong Kong and London. However, achieving similar infrastructure is difficult in the near term. This could be one reason why global investors are refraining from putting money here,” said Alok Churiwala, managing director, Churiwala Securities.

Experts say the purpose of setting up the GIFT City is to push India as a global financial centre, the government and Sebi should ensure that it doesn’t end up being a tax haven for domestic traders.

The key attraction of the GIFT platform includes no securities transaction tax (STT) and stamp duty. Also, entities operating out of the GIFT City don’t have to pay corporate tax for a period of five years, after that there is a 50 per cent concessional tax rate for the next five years. 
 

Besides, there is no short-term capital gains tax on equity transactions if traders have a base on the GIFT premises, which makes trading almost free. The companies located in financial centres shall not be liable to dividend distribution tax, while minimum alternative tax (MAT) shall be charged at the rate of nine per cent, against 18.5 per cent for other companies.