India Widens Market for Foreigners Easing Derivatives Limits

A recent change to India’s trading rules has opened the door for fund managers to increase their holdings of derivatives in the country, loosening restrictions that had stifled trading, reports Bloomberg.

The Securities and Exchange Board of India last month increased the combined futures and options trading limit by removing some caps on contracts and on the market value of positions held. The changes mean an average increase in allowed holdings of 550 percent on futures contracts traded at venues operated by the National Stock Exchange of India Ltd., according to an analysis by Citigroup Inc.

The move may boost foreign investor sentiment toward India, which has recently been soured by uncertainties over the tax rules facing offshore firms. Derivatives are the only means to effectively short Indian stocks, and an important way for foreign firms to invest in a market that still offers restricted access. Foreign banks, which previously had to open multiple entities in India to get around restrictions, should now be able to trade through a single entity, according to ICICI Securities Ltd.

“The change will enable global investors to raise exposure to Indian derivatives manifold as they won’t get stuck due to smaller limits,” Akash Dharia, head of derivatives at ICICI Securities, said in a phone interview. “We expect futures volume to go up in the long run.”

SEBI on Monday waived the requirement for mutual funds that don’t mention derivatives investments in their information documents to obtain consent from the majority of unit holders before buying contracts.

Tax Disputes

Foreign investors have been net sellers of Indian stocks for the past four months amid uncertainty over implementation of tax measures including the General Anti Avoidance Rule.

The Rule, set to come into force on April 1, seeks to prevent companies from routing transactions through other countries to avoid tax. A circular issued in December was put on hold in January after foreign investors aired their concerns about the regulation, which may see them face multiple taxation on the same income -- in India and in their home markets.

Foreign-owned companies are involved in a number of tax disputes in India. Cairn Energy Plc is contesting a $3.3 billion claim on share transfer pricing gains made on its Cairn India business, while a case involving Vodafone Group Plc’s 2007 acquisition of the Indian unit of Hutchison Whampoa, now part of CK Hutchison Holdings Ltd., is in international arbitration.

Institutions from outside India have a bigger influence in equity derivatives trading compared to the nation’s debt markets, and foreigners can’t trade Indian commodities. Offshore investors hold a long or a short position in an average 52 percent of contracts, according to exchange data.


“A higher derivatives cap helps in better management of portfolio risk and so it can raise trading volumes,” said Vaibhav Sanghavi, who will manage a long-short equity hedge fund as co-chief executive officer at Avendus Capital Alternate Strategies Pvt. “Foreign investors will watch out for the effect of taxation changes like GAAR in April before deploying big money.”

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