Remittance scheme rules need review for GIFT exchanges

Individual traders wanting to transact through the international exchanges at the upcoming GIFT City near Ahmedabad might not be able to do so under existing Liberalised Remittance Scheme (LRS) rules.

These do not allow the LRS route to be used for speculation activity, including trading in derivatives or any other financial instrument, as well as for funding margin calls. This can be a problem, as the majority of products to be traded on the international exchanges, be it currency, commodity or equity, will be derivatives-based.

Under LRS, all resident individuals may remit up to $250,000 abroad every financial year for education, travel, medical treatment, purchase of shares and property, among other things.
 

Participants in the derivatives markets are generally divided into hedgers, speculators, margin traders and arbitrageurs. These often leverage or pay a fraction of the total value of their positions to trade.

“Some concession will have to be given by the Reserve Bank to ensure resident Indians can trade in these products through the international exchanges,” said Tejesh Chitlangi, partner, IC Legal. “Other practical difficulties might come to light once trading begins and regulators will have to be quick to respond to these challenges, to ensure no major hiccups.”

An e-mail to RBI in this regard did not get a response.

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“RBI will have to tweak existing norms, allowing resident Indians to use some portion of the LRS limit for derivatives trading. Whether this is 50 per cent of the LRS amount or more will have to be decided,” said a broker, on condition of anonymity.

In the Securities and Exchange Board of India's 2015 guidelines for International Financial Service Centres (IFSCs), any recognised entity or entities, including brokers and stock exchanges, desirous of operating in IFSC as an intermediary has to form a separate company and then get the regulator’s nod. These intermediaries can cater to four sets of clients -- persons not resident in India, non-resident Indians, financial institutions resident in India eligible to invest funds offshore and resident Indians, subject to the LRS limit.

Various tax sops for exchanges, including exemptions from stamp duty, as well as commodity and securities transactions tax (STT), will encourage a lot of investors and traders to take up positions in derivatives products through the GIFT City route. “STT is one of the biggest sore points for investors participating in derivatives trading and the new exchange will eliminate that. A lot of Indian traders dealing in equity derivatives from Singapore and Dubai could be tempted to set up desks here,” said a broker.

Several emerging IFSCs around the world, such as Shanghai and Dubai, are aspiring to play a global role in the years to come. London, New York and Singapore are among the global financial centres.