What is Gift Nifty?

In recent days, I’ve heard a lot about “Gift Nifty” in many discussions. There has been a lot in news as well about Gift Nifty and Gift city achieving different milestones. So, I thought of discussing about “Gift Nifty” in this blog. And before anyone thinks in that direction, let me clarify that it's not about gifts and presents. Instead, Gift Nifty is a first cross-border effort that links India and Singapore's capital markets. In fact, from July this year, Gift Nifty has replaced SGX Nifty, the index traded on Singapore's stock exchange. To grasp its importance, let's explore the origins of SGX Nifty, the rationale for this transition, and the broader implications it carries.

In the year 2000, NSE was a new stock exchange in India. It had the popular Nifty 50 index made up of 50 of India’s largest companies. NSE launched a derivative of this index called the Nifty futures contract.

But what is a derivative (Futures & Options) contract?

Derivatives, such as futures or options, are financial contracts which derive their value from a spot price of an asset, which is called the “underlying”.

So Nifty 50 is the underlying for Nifty derivatives (Futures & Options) and the prices of these contracts would be driven by the spot rate of Nifty 50 itself.

Now let’s see what SGX Nifty is. SGX Nifty is a derivative contract traded on the Singapore Stock Exchange based on Nifty 50 Index. Within three months of NSE launching its trading on the Nifty futures on June 12, 2000, SGX offered the product in September 2000. In simpler terms, as we trade in Nifty 50 futures on the NSE, foreign investors trade on SGX Nifty at the Singapore stock exchange in dollar terms.

You might be curious as to why there was a necessity to conduct trading activities in Singapore when the same could be accomplished in India.

The reason behind this lies in India's desire to simplify the involvement of foreign investors in its markets. However, India's reputation and dependability were not fully established during that period. Consequently, India sought to leverage the credibility of another nation, and Singapore emerged as a significant financial hub suitable for this purpose. The establishment of SGX Nifty thus provided foreign investors with an avenue to gain exposure to the Indian market, ultimately enhancing India's global recognition. An additional advantage of SGX was that investors could avoid dealing directly with the Indian rupee. With these considerations in mind, the National Stock Exchange (NSE) of India entered into a partnership with the Singapore Exchange. Under this arrangement, NSE would supply data related to Nifty's prices to the Singapore Stock Exchange (SGX), allowing SGX to create a parallel index and introduce a futures contract for trading in Singapore, known as the SGX Nifty.

There were many advantages for foreign investors when it came to SGX Nifty. These investors could take part in the uptrend of the Indian market which is considered as one of the biggest and fastest growing market. These investors also had access to extended trading hours as SGX Nifty was traded from 6:30 a.m. to 11:30 p.m. IST. Additionally, they could continue trading in dollars reducing forex risk if they were to trade directly in Indian markets with Indian rupees. This all lead to SGX Nifty being a huge hit so much so that it had attracted approx. 5 times more volumes than its original counterpart.

So then what is Gift Nifty and how does it come into picture. Well Gift Nifty is essentially an Indian substitute for SGX Nifty. You might be wondering over the success of SGX Nifty and questioning the rationale behind transitioning to GIFT Nifty.

Well, this shift was prompted by various considerations, which we'll delve into. It's important to note that while SGX Nifty performed well and attracted increased volumes, most of these advantages accrued to Singapore, with minimal benefits for India. Additionally, SGX had intentions of introducing more derivatives from the Indian market, which led SEBI to address concerns about the SGX’s growing market share and foreign exchanges potentially dictating prices for the Indian market. Hence, the introduction of GIFT Nifty was strategically driven.

Primarily, it aimed to bring in the substantial trading volume associated with SGX Nifty back to India. Moreover, GIFT Nifty aligned with the promotion of Gujarat International Finance Tec-City (GIFT City), an exclusive financial center offering foreign businesses a 10-year tax holiday and other incentives. The establishment of the International Financial Service Centre Authority (IFSC Authority) further streamlined regulatory oversight within GIFT City, consolidating various regulatory roles, including those of SEBI, RBI, IRDA, and PFRDA, under a unified IFSC Authority umbrella. This consolidation enhances the appeal of GIFT City as a centralized financial hub.

With the introduction of Gift Nifty, the SGX Nifty ceased to exist from June 30 and GIFT NIFTY 50 started to trade from July 3 on the GIFT/NSE IFSC. Following the transition, all US dollar denominated Nifty derivatives contracts will be exclusively traded on NSE IFSC. The GIFT NIFTY starts at 6:30 a.m. IST and continues till 3:40 p.m. IST. The second session from 4:35 p.m. IST to 2:45 a.m. IST (next day) targets investors from the United States and Europe. Effectively, trading on GIFT Nifty will be available for over 21 hours a day.

The introduction of GIFT Nifty will be very beneficial to India as it would reduce its dependence on Singapore and simultaneously bring the trading volumes from foreign investors and traders to India. Also, by taking this action, GIFT City would further solidify its position as a new financial hub that the government plans to build in order to compete with other major financial hubs like Dubai, Mauritius, and Singapore.

Trading volumes on GIFT IFSC will get a dramatic boost with this migration. Any trader who wants to trade Nifty contracts in dollar terms must execute them on the GIFT IFSC through the SGX connect from July 3. Going forward even if foreign investors trade on SGX, SGX through its Special Purpose Vehicle (SPV) company, called the SGX IFSC India Connect Limited, will start routing all the orders from the international clients into our exchange. This SPV is a trading member and a clearing member at the NSE IFSC. Shortly, trading of futures and options will be held in the GIFT City and SGX will take care of clearing. A foreign investor can also start trading directly from Gift City once he gets registered with one of the brokers connected with Gift/NSE IFSC. However, it may take some time before we see rise in traders registering directly with stock brokers in GIFT IFSC. One has to understand that though the trading has shifted from SGX to Gift IFSC, there is still some form of arrangement between these two entities and as per the deal revenue is also shared between SGX and Gift.

Similar to SGX Nifty, Gift Nifty is also traded for extended hours. This leads to Gift Nifty being more volatile than NSE Nifty. Furthermore, trading on Gifty Nifty for Indian investors is still more difficult than trading directly on NSE as it has additional rules and regulations applied to it.

If we consider it from the point of view of foreign traders who were trading SGX Nifty before this shift then all the tax and operational benefits the traders enjoy at SGX will be available at NSE IFSC to the traders who wish to migrate. In fact, trading Gift Nifty might come at reduced cost as the traders will not have to pay fees and charges at both SGX and NSE. The Government is thinking long-term and wants FPIs to migrate lock, stock and barrel eventually.

As far as traders within India are considered, there is no change because of this shift. It will be business as usual for traders and investors of NSE/BSE. It is just that instead of SGX Nifty, they would be checking GIFT Nifty as first indicator before starting the trading sessions in the morning.

In conclusion, with the introduction of Gift Nifty, India is one step closer in making its market open on a truly global scale and reducing its dependence on other countries.