Budget 2023: P-notes, SGX Nifty trading at GIFT City likely to get a boost

Budgetary sops for the International Financial Services Centre (IFSC) not only help remove key irritants around participatory note (p-note) issuances but also boost trading in SGX Nifty contracts, which is set to begin in four months.

With the new provisions addressing the issue of double taxation faced by overseas investors while distribution of income, foreign portfolio investors (FPIs) are expected to prefer GIFT City as a preferred gateway for dealing in Indian securities.

Legal experts said the budgetary measures would go a long way in shifting offshore derivatives volumes to GIFT City as the region would now become tax neutral with other overseas jurisdictions, such as Singapore, Mauritius, and Luxembourg.

“The announcement is likely to enlarge the bouquet of products relating to India investments (such as p-notes, trading in SGX Nifty contracts, India corporate bonds, government securities) that can be offered by banks located at the IFSC by bringing them on a par with their global counterparts in other offshore financial centres. This will also deepen capital markets capabilities and offering at the IFSC,” said Tushar Sachade, partner, Price Waterhouse & Co.

The so-called NSE IFSC-SGX Connect is scheduled to be launched in June. Under this, Nifty contracts that are currently traded on the Singapore bourse would be routed through GIFT City. About 14 SGX clearing members have been onboarded for the transition.

The Finance Bill seeks to amend the Securities Contracts (Regulations) Act to provide that the contract in derivatives issued by a foreign portfolio investor (FPI) in an IFSC would also be legal and valid.

Experts said p-notes issued at GIFT would not boost flows into the onshore markets in a big way but would be used for securities traded at the IFSC.

“While this provision is aimed to provide clarity, it is unlikely to impact direct inflows in the equity capital markets given that under the extant regulations, the issuers are required to hold shares to issue a p-note,” said Sachade. 

“P-notes have been revalidated after being previously banned as an invalid contract under the SCRA. The regulations for ODI investment through GIFT City have remained unchanged,” said Manick Wadhwa, director of strategy, SKI Capital Services.

The daily average value of the contracts traded on the SGX for the Nifty50 remained at Rs 4.2 billion since January 2023. FPI assets worth over Rs 96,000 crore are held via p-notes.

“They have proposed to extend tax exemption on income distributed on offshore derivatives instruments (p-notes) as entered into with an offshore banking unit at GIFT City. Earlier, only transfers of such ODI were exempt and not the income. This, this is going to have more money being pumped into IFSC by way of ODI,” said Harish Kumar, partner, Luthra and Luthra Law Offices India.