0.1841
900 319 0030
x

Concerns with FPI

iasparliament Logo
December 28, 2017

What is the issue?

  • Singapore stock exchange and Dubai Gold and commodities exchange are planning to expand their portfolios in India.
  • These decisions are taken in a backdrop of uncertain environment for Foreign Portfolio Investments in India.

What are recent portfolios decisions about?

  • A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds.
  • Portfolios are held directly by investors and/or managed by financial professionals.
  • Usually an investors should construct an investment portfolio in accordance with risk tolerance and investing objectives.
  • Recently Singapore Exchange (SGX) has decided to offer single-stock futures (SSF) on Indian stocks.
  • The Dubai Gold and Commodities Exchange (DGCX) is also considering expanding its portfolio of Indian SSF.
  • Volumes in India’s derivatives trading segment is expected to be adversely affected by these decisions.

How these decisions would hurt India?

  • Unlike the National Stock Exchange (NSE) and the BSE, the SGX and the DGCX are open 24x7 and these are hard-currency environments.
  • There are no transaction taxes akin to India’s securities transaction tax (STT) and the local regulators also place no restrictions on foreign portfolio investors (FPIs).
  • Given that the SGX and the DGCX offer comfortable regulatory environments, a lot of the derivatives trading volume will likely shift to these offshore centres.
  • India will lose out on tax revenue and brokerage income and traders will face disadvantage of beingresponsive.

Whatare the barriers for FPI in India?

  • In July, SEBI banned trading in derivatives via P-Notes and demanded direct registration of FPIs carrying out derivatives trades.
  • The regulator said derivatives trading via P-Notes would be allowed only to hedge underlying cash positions.
  • At the time of the ban, P-Note holders had open positions of over Rs 40,000 crore in the futures and options segment of the NSE, all of them where closed out after this move .
  • A further barrier for US-based funds was that they cannot take direct exposure to derivatives offered by Indian exchanges, which are not approved by America’s Commodity Futures Trading Commission (CFTC).
  • Many used P-Notes to bypass that requirement, as both SGX and DGCX are CFTC-approved and Indian exchanges are not.
  • High Securities Transaction Tax (STT) in India is being another source of friction for FPIs, which are being significant cost for high-volume traders.

Source: Business Standard

Quick facts

FPI

  • Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors.
  • It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
  • Foreign portfolio investment is different from foreign direct investment (FDI).

Participatory Notes (P-Notes)

  • These are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities.
  • Any dividends or capital gains collected from the underlying securities go back to the investors.
  • Indian regulators are against participatory notes because they fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.

SSF

  • Single Stock Futures (SSF) are derivatives instruments that give investors exposure to price movements on the underlying share.
  • A futures contract is a legally binding agreement that gives the investor the ability to buy or sell an underlying listed share at a fixed price on a future date.

STT

  • Securities Transaction Tax is levied on every purchase or sale of securities that are listed on the Indian stock exchanges.
  • This would include shares, derivatives or equity-oriented mutual funds units.
  • The rate of tax that is deducted will vary with different types of transactions and securities.
  • STT is deducted at source at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.
Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme