Reuters has a report indicating that the volume of trading in Indian derivatives in the Singapore market is almost as robust as that in the Indian market. This suggests that the Indian capital markets are being exported overseas. Investors are able to enjoy the investment benefits in Indian underlying assets or investments without actually investing in India.
Usually, this phenomenon occurs for one of two reasons. The first is that the domestic system suffers from inefficiencies that compel investors to migrate to a more suitable system. The second is a case where investors might be seeking to invest in jurisdictions that are less stringently regulated, a classic case of the “race to the bottom”. In this scenario, it is clearly the first reason, particularly due to the uncertainty in the Indian tax regime in the last year or so.
This is not the first time such a phenomenon has occurred in India. The participatory notes structure was devised in the last few years precisely for this reason, as I have discussed in this paper.