How retail participation can deepen Indian IFSC exchange

The first IFSC exchange was established in 1987, in Ireland. Since then, it has been very popular for investing into certain stocks without attendant risks of foreign exchange fluctuations and easier entry and exit. The first IFSC exchange in India was established in 2017, 30 years after the first exchange in Ireland was established.

Currently IFSC exchanges in India have reported 103 million trades and $1.5 billion value of trades including notional values in 2021-22. Based on current run rate the projected volumes for 2021-22, is 206 million trades and $3.121 billion value in notional terms. This is an approximately 50 per cent increase YoY.

The investors in International Financial Centre Stock Exchanges of India are generally institutions at this point of time. As time progresses it is expected that more retail investors will invest in the exchanges and lend further depth. With the regulator and the government allowing equities via GDR listings the process will pick up speed. The question that comes of therefore is how can we increase the liquidity of such exchanges through retail participation?

The answers to those questions are no different than those that apply to any financial centre or any capital market exchange. Higher participation of all kinds of investors, whether institutional or retail investors will lead to better price discovery; scope for arbitrage will ensure the vibrancy of these exchanges.

India is a very vibrant capital market and it has increased its activity over the years. In the near future the market capitalization of listed Indian stocks is likely to surpass those of the United Kingdom and will take us to the fifth largest capital market in the world by market capitalization (mcap).

I personally believe that Indian investors have the ability to invest as well as trade in quantum in comparison to international investors, investing into India or and other parts of the world.

Our stock market capitalisation has surpassed our GDP by 1.4 times. Indian investor exposure to Indian mutual funds' investments now stands at 12 per cent of the GDP compared to 13 per cent of China. We are a young country in a way and can go up to 60 to 70 per cent of our GDP either directly through exchanges or through mutual funds. We are therefore talking of a potential 1.2 trillion dollars of additional savings that can be routed into capital markets by Indians. At the moment India has 48 million retail depository accounts and retail participation is at an all-time high.

In addition to investing in India, Indian retail investors are also looking to diversify into global markets. In fact, reasonably wealthy Indians invest in global equities or alternative funds using the liberalized remittance scheme method mainly for funding the foreign education of their children. There are many Indian investors who have invested into the FAANG stocks. FAANG is an acronym for Facebook, Apple, Amazon, Netflix and Google stocks. Subject to certain conditions and through Interconnect facilities Indian IFSC exchanges will soon facilitate investments through access (to securities listed in 130 exchanges,31 Countries worldwide) or "Traded but not Listed "method for such international stocks, for retail investors. This will possibly be achieved by using fractional ownership stock units when warranted.

The international exchanges of India can certainly qualify to be a regional capital market hub for the nearby countries, mainly the SAARC countries and then ASEAN. Proximity to issuers, reasonable cost of listing and similar cultures besides state-of-the-art exchange technology in India makes it mandatory for regional issuers to seriously look at global depository receipt issuances in the IFSC exchanges of India. Indian retail investors would themselves invest in such issuances as they are aware of the issuers and their country. For Indian investors, these are emerging markets. Such listings are also politically important for India. As an example, Sri Lankan companies listed in IFSC represent a potential opportunity for retail Investors as many of the corporates from Sri Lanka are one way or the other known in India.

International retail investors both wholesale and retail can invest in equity via Indian GDR listed in IFSC exchanges. This represents a huge opportunity as it would eliminate foreign exchange risks of Indian stocks. It also makes entry and exit easier. Already single stock derivatives have been listed in addition to bond, index etc, of Indian issuers.

Indian Startups especially foreign domiciled unicorns with global businesses can be listed in IFSC exchanges as GDR thus providing an opportunity for Indian and International retail investors to invest in these companies which would have otherwise have had to list in both an international and domestic exchange in two different geographies.

Arbitrage opportunities between the home country market and Indian IFSC can also be a source of alpha for certain retail investors specially, family offices. All of the above represents opportunities to improve the liquidity vibrancy of Indian IFSC stock exchanges true retail participation. The sky's the limit!

(The author is Founder & Managing Director of Basiz Fund Service Pvt Ltd)