BUYING and selling shares in India is not for the faint of heart. Its own central-bank governor reckons equity capital is taxed up to five times. Never fear. There is a well-established alternative. Investors can just as easily buy financial instruments that track share prices but are not themselves shares. Such “derivatives” are used across the world to mirror markets in everything from platinum to pork bellies. But they also raise awkward questions: can the exchange that generates prices by matching buyers and sellers stop a rival using the data to create its own derivatives?
A quarrel between the Singapore Exchange (SGX) and the National Stock Exchange (NSE) in Mumbai touches that very issue. Since 2000 global investors wanting exposure to Indian shares but not Indian red tape and tax have gone via SGX. Under a licence from NSE, punters could trade a derivative linked to the Nifty 50, an index which is to India what the FTSE 100 is to Britain or the S&P 500 is to America.
Because the contract paid out the value of the Nifty on a given date, arbitraging algorithms run by outside traders ensured the derivative tracked the index closely: buying the Nifty in Singapore or Mumbai amounted to much the same thing. But in February NSE ended the arrangement. It now thinks all trading can happen in India thanks to new regulatory arrangements that make it just as amenable to global capital as Singapore.
That claim is doubtful. In any event, SGX is clearly not keen to find out. Instead of licensing the Nifty brand and paying the NSE for a steady flow of data, as hitherto, SGX said it would switch to what is in effect a home-brewed duplicate. Whereas the “real” Nifty is designed to match the price of an underlying basket of 50 shares, the new product is designed to match the price of the Nifty derivative instead. It is, in other words, the derivative of a derivative.
That is just a fancy way of breaching copyright, the NSE argues. It owns the Nifty trademark and SGX’s product is but a thinly veiled clone of its own. SGX does indeed seem to be making no effort to differentiate itself. The marketing literature for its new derivative says it aims to track 50 shares that together represent 65% of the Indian market, just like the Nifty. The only difference is that it does not mention it by name.
Lawyers on both sides are brushing up on intellectual-property law. An arbitrator in Mumbai is due to make a ruling by June 16th, though appeals are expected. SGX has some precedents on its side. In 2005 a New York judge ruled that ICE, a commodity exchange, had broken no law when it lifted publicly available energy prices from NYMEX, a rival, to fuel its own derivatives contracts. “Settlement prices are not copyrightable because they are facts, and not original, creative works,” he said.
Nobody is arguing against SGX’s right to set up a derivative on individual shares listed in Mumbai; it recently started doing just that. But tracking the whole Nifty requires using one monthly value, calculated by NSE, to “settle” the derivative. Arguably this calculation is closer to an art than publishing a single fact. American courts have found firms that provide such indices (for example, on which stocks are included) may indeed limit their outside use.
Though the row hurts both sides, no deal seems in sight. MSCI, which crafts a popular emerging-markets index that guides the investment of trillions worldwide, has warned that trying to throttle the dissemination of price data would make it harder for money to flow into India. It has argued that stockmarkets are natural monopolies that should in effect be compelled to sell their prices to whoever wants them. Information wants to be free, but try telling that to those compiling the data.