Singapore-India securities market link the next step?
With the NSE IX-SGX GIFT Connect now fully operational as of July 2023, allowing trading of USD-denominated GIFT Nifty derivatives, the logical next step is for SGX to explore the development and implementation of a depositary receipt (DR) to link the securities market of Singapore with thnd the bourses of Mumbai, the National Stock Exchange of India (NSE), and the Bombay Stock Exchange (BSE).
Such a move would significantly deepen economic connectivity and further enhance the capacity of Indian listed companies (listcos) to access capital. The groundwork for such capital markets infrastructure is already in place, considering the significant economic partnership between Singapore and India and the strength of India’s IPO markets.
In FY 2022, Singapore accounted for 27.3% of India’s overall trade with the Association of Southeast Asian Nations (ASEAN). Moreover, shifting supply chains are leading Singapore enterprises to tap into Indian metropolises for talent and manufacturing operations.
The Comprehensive Economic Cooperation Agreement (CECA), established in 2005, has played a crucial role in anchoring capital flows and fostering economic engagement between India and Singapore. Singapore has been a leading source of foreign direct investment (FDI) into India, contributing close to 23% of total FDI inflows over the last two decades, which amounts to approximately US$140.98 billion, according to consultancy Dezan Shira & Associates.
Presently, Indian companies face limitations when seeking listings on foreign exchanges, often relying on depository receipts — negotiable financial instruments issued by depositary banks that represent shares of companies. Although this approach allows access to international investors and capital from foreign bourses, in 2020, New Delhi considered allowing primary listings on foreign exchanges. However, due to opposition from nationalist groups, the proposal was suspended, and the focus shifted to reinforcing India’s domestic capital markets.
However, with the establishment of Gujarat International Finance Tec-City (GIFT-IFSC), both listed and unlisted Indian companies now have the opportunity to access foreign capital benefits through the IFSC route. Designed to compete with overseas financial centers, GIFT-IFSC offers a tax-neutral environment, fiscal incentives, and favorable regulations, making it a cost-effective and attractive option for businesses seeking foreign capital.
Since the 2013 penny stock crash, Singapore’s equities market has faced challenges despite the notable strength in the forex and derivatives domains. A major contributing factor to this lacklustre performance is the shortage of long-term capital, a concern shared with the London Stock Exchange (LSE).
Singapore’s public sector maintains a unique policy that emphasises investments overseas for funds managed by esteemed financial entities such as the sovereign wealth fund GIC, pension fund Central Provident Fund, and state investment firm Temasek Holdings. In contrast, financial centres like Bangkok, Hong Kong, Tokyo, Sydney, Zurich, and Frankfurt enjoy the benefits of public sector asset allocation to domestic equities.
Recognizing the need to attract more capital to the local market, the SGX has adopted an outward-looking perspective. In 2018, it proposed a trading link with the Bursa Malaysia (BM) in Kuala Lumpur. Unfortunately, this initiative faced challenges due to political reasons. However, the SGX has since focused on enhancing connectivity and drawing capital flows to the bourse through mutual market access schemes.
In December 2022, the SGX achieved a significant milestone by concurrently listing two exchange-traded funds (ETFs) in Singapore and Shenzhen as part of the ETF link between SGX and Shenzhen Stock Exchange (SZSE). Furthermore, in May 2023, the SGX demonstrated its commitment to launch a similar ETF link with the Shanghai Stock Exchange (SSE) while also facilitating trading of Depositary Receipts (DRs) via the Thailand-Singapore DR Linkage.
As India’s enterprises face restrictions from accessing foreign capital through overseas listings, the potential for tapping into the growth of India’s robust capital markets becomes evident. In June 2023, the value of Indian stocks surpassed those of the UK and France, ranking fourth globally. International investors have shown keen interest in India’s share market as it rides a growth wave. Presently, India trails only the US, China, and Japan, accounting for 3.3% of the combined market cap of major global markets.
Mutual interconnectivity between India and Singapore’s capital markets can boost visibility for companies in both regions. Indian companies can pursue secondary listings in Singapore, expanding their international reach and enhancing capital flows between India, Singapore, and ASEAN. Singapore’s dividend-oriented securities market also offers a secure wealth preservation hub for Indian retail and institutional investors.
Despite global turbulence, Singapore’s flagship Straits Times Index (STI) performed exceptionally in 2022, generating a 4.1% price gain with a total return of 8.4%. This outperformed other Asia Pacific and Developed Indices, placing the STI among the top global benchmarks.
The Thailand-Singapore DR Linkage, operational since May 2023, enables trading of Depositary Receipts (DRs) on either market, aligning with respective domestic market rules. A similar model could be adopted for collaborations with India’s BSE and NSE, considering differing regulations.
The timing seems favourable amid India’s economic ascent and the recent implementation of the GIFT Connect. Embracing such connections with the NSE and BSE will strengthen both nations’ capital markets, fostering sustainable growth and prosperity in the region.
India’s ascent to become the third-largest global economy by 2027 and the projected growth of its middle-class population provide compelling opportunities for investors. By 2030, OECD estimates indicate that 68.4% of India’s population will be categorised as “middle class,” wielding 83.6% of the country’s spending power. Similarly, ASEAN is poised to surpass Japan’s economy and create a consumer market worth US$4 trillion, with 70% of ASEAN’s population joining the middle class.
India and ASEAN’s economic growth is fueled by strong domestic consumption and the reconfiguration of supply chains by international conglomerates, seeking to build additional capacity beyond China. Investments from major companies like Apple and Foxconn in India signal confidence, attracting more capital and fostering a virtuous cycle of growth.
Amid demographic distress, coupled with economic and geopolitical headwinds, international investors are finding Chinese equities less appealing and turning to Indian equities as a safer hedge. New Delhi’s strong government support for manufacturing and infrastructure sectors, along with attractive incentives for foreign investors, further enhances India’s appeal.
The strategic partnership between India and Singapore in capital markets also offers geopolitical advantages. India’s economic gravity and Singapore’s international finance links create a political hedge against China’s economic statecraft and economic coercion. Singapore has a history of supporting India’s engagement with ASEAN, reinforcing the potential for deeper connectivity and cooperation between the two countries.
Singapore has recently expressed concern over Beijing’s messaging to overseas Chinese communities, which is seen as a vehicle for China’s geopolitical ambitions. As the only countries outside of China with significant ethnic-Chinese majorities, Singapore and Taiwan are particularly cautious about this influence.
Moreover, Singapore also maintains a delicate balance, engaging with major powers in ASEAN and maintaining a close security partnership with India, which hosts Singapore military assets for training. It also stands out for having Indians constitute close to a tenth of Singapore’s native population and are its third largest ancestry and ethnic group.
Building financial infrastructure to deepen ties between India and Singapore is crucial for both nations. India’s ongoing transformative phase, marked by significant shifts in its social, economic, and political spheres, positions it as the fastest-growing major economy. By leveraging its economic heft and geopolitical influence, India can extend its reach in ASEAN while simultaneously enhancing its finance sector.
Kishore Mahbubani, a Singaporean diplomat and geopolitical consultant, emphasises the importance of seizing the moment with India’s imaginative potential amid the current geopolitical environment. In a 2021 commentary, he highlights the historical economic significance of India and China as members of the G2 for a substantial period.
China’s rapid economic growth was attributed to globalization and competition. Similarly, India’s potential inclusion in the RCEP might lead to short-term “creative destruction” but ultimately foster long-term economic strength, as demonstrated by ASEAN’s experience. India needs to embrace globalisation, given the parallels with ASEAN’s successful journey despite initial concerns.
Establishing a deeper financial partnership with Singapore, a key player in the global finance centre ecosystem, holds tremendous potential. Leveraging the momentum of the GIFT Connect presents a unique opportunity to accelerate the global reach of India’s entrepreneurs, enterprises, and economy.
Forging a stronger financial alliance between India and Singapore can yield mutual benefits, providing India with increased influence in ASEAN while enhancing Singapore’s finance sector. As both countries navigate geopolitical complexities, the shared vision of a dynamic partnership presents a gateway to a brighter future.
