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RASHESHSHAH
Chairman
Edelweiss
Group
I
NDIA is a net importer
of capital. Our current account deficit is on the verge of touching
3% of GDP (-$40 billion). To sustaina GDP growth rate of 7%, we require
over$300 billion of capital, of which ~$40 bil-lion-50 billion needs
to come from external sources. This can flow into India via equity—
portfolio flows or FDI—or via borrowings.
Foreign
investors provide two important elements — capital and international
linkages. So the question is, do we need their capital for our growth
and are international linkages beneficial?
Over
the past five years, portfolio flows into India have been ~$70 billion.
Currently, FIIs hold dose to -17% of Indian market capitalisation versus
-50% with promoters and -13% with Indian institutional investors. Hence,
FIIs are an important institutional investor base for markets.
Over
the years, FDI flows have been relatively low; our external capital
requirement has been met largely by portfolio flows. Dependence on
portfolio flows can be reduced if we can enhance FDI investments by
easing the processes surrounding them, e.g., relaxing sectoral thresholds
on FDI, easing approval processes, changing labour laws, especially
with regard to manufacturing, etc. Of the two, FDI is better for the
country as it is more stable.
We
can also borrow to bridge this gap through ECBs, local Indian bonds,
and sovereign borrowings. Except forthe Resurgent India Bonds and India
Millennium Deposits, we have resisted sovereign borrowing but have allowed
corporates to borrow via ECBs and FCCBs. However, this is going to become
difficult and expensive in the near future and hence, may not be a
big enabler of capital flows in to India. Also, with foreign reserves
of -$275 billion, this is not optimal, as effectively the RBI is lending
dollars to the US government and Indian corporates are borrowing in
dollars at higher interest rates.
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Allowing
foreign investment in local bonds is a good way of getting debt flows
to India. This, combined with equity, will result in more consistent
capital flows.
The
linkages that FIIs provide have their pros and cons. They have brought
heterogeneity to our markets (as FIIs come in all colours and shapes),
improved governance quality, and made our markets more efficient. But
the downside is that they link us to global markets and bring some of
the riskier global practices into our markets, as we are experiencing
currently. However, as we increasingly integrate with global markets,
this is essential and inevitable.
One
other route of getting foreign capital would be to allow corporates
and foreign individuals to invest directly into our markets. This will
add a few more investor categories and make it more heterogeneous.
We should also create more categories of local institutional investors
in our markets.
Access
to capital is going to be difficult and expensive over the next couple
of years. There are pockets of capital surpluses in the world such as
Japan and West Asia. We should strategically and tactically cultivate
these sources to protect our growth needs. On a medium-term basis,
we can reduce our dependence on foreign capital by improving our current
account balance and making local capital more efficient. A gap of $40billion
to $ 50 billion is small for a country like India to bridge through
productivity and efficiency in capital utilisation. By embarking upon
prudent financial sector reforms, loosening the red tape, and improving
infrastructure we can easily reduce this gap down by half. On a long-term
basis, by making public assets more efficient, investing in health and
education, we can become self dependent for capital needs.
FII
investors are necessary, but they should not be our main source of external
capital. We should encourage alternative means such as FDI as well.
Also, FQ rules and investment processes should be regulated (rather
than FII accreditation) so that distorting practices such as PNs do
not become a threat to our markets.
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SAN
JAY SIN HA CEO, DBS Cholamandalam
AMC
T
HESE are unprecedented
times. In our living memory we have not seen the scale of global financial
crisis like the one confronting the world today. Major economies of
the world are slipping into a recession. This is very different from
the recession of 1930s which was confined to only one geography and
the level of global integration was not so high. Therefore there are
no lessons in history that can be applied to the situation to assess
its magnitude and extent of impact. How do we navigate through this
situation? It may not be totally correct to say that the world has not
seen a synchronous reaction of stock markets. As recently as 2001, the
dotcom collapse followed by 9/11 sent the world markets, including India,
into a tailspin. The economic resurgence of India in the period that
followed propelled the sensex from 2,950 points to 21,000 points in
a span of 4.5 years, a CAGR of 52%. During this phase, the Indian GDPgrewfrom
3.8% in FY 2003 to 8.5% in FY04 and on to 9% in FY 08 while the global
GDP grew from 1.39%CY03to 2.61% in CY07.Today, despite global recession
India is debating between a 7% or 8% GDP growth!
The
risk appetite of Indian investors has gone up exponentially. The approach
to equity investment has also changed. Over six million investors entered
a mutual fund scheme in 1992 with lump-sum investment as a pure speculative
action and were left disappointed in the post-Harshad crash. The mutual
fund industry now has over 36 lakh systematic investment plan (SIP)
accounts where investors commit a staggered investment in equity. Indians
by and large under-own equity and were just about warming up to this
asset class. With savings/GDP ratio of 34% there will always be need
for savings avenues. The issue that they need to resolve is the right
mix of asset allocation between
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physical
assets, debt, equity and commodities. The larger question that is being
asked is not whether equity is a right asset class but where will the
markets bottom so that the flow to equity can increase?
Market
bottom will be a function of liquidity, valuations and events. These
three elements are not totally delinked from each other. Domestic
institutions such as mutual funds and insurance companies have absorbed
the Rs 50,000 crore sold by FIIs year to date. This picture is getting
slightly dark, with domesticinvestors turning a little wary of the markets
of late. This will be very sad. The outstanding value of FII investment
is estimated to have come down from a peak of $220 billion to around
$80 billion against $60 billion at cost. The quantum of incremental
selling from them may not be as large as we have seen year to date.
But there may be some FIIs who may still have to resort to distress
selling and provide stocks at very attractive prices. It makes sense
to accelerate portfolio balancing in favour of equity if we underown
it. Other long-term institutional sources such as pension, provident
funds and trusts can also do this. What about a national investment
fund (NIF) that can reallocate more to equity? With analysts predicting
an earnings slowdown, valuations may cause uncertainty. But don't markets
factor this in their levels before downgrades are actually announced?
While the global news flow has been consistently bad for the last few
months, the macro picture for India is becoming rosier. Crude and commodity
prices have fallen. New domestic sources of fossil fuel are becoming
operational, further easing the pressure on current account deficit.
Inflation and interest rates are showing signs of moderation with the
RBI and Planning Commission talking of a target rate of 7% by March
'09. A discerning fund manager should be able to spot the irrationality
between stock prices and fundamentals in such situations for the benefit
of his investors. Decoupling will happen, but it will be naive to expect
it to be painless. To make it happen, we will have to be more than just
bystanders.
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DHARMESH
MEHTA Head of Equities Enam
Securities
T
O SAY that Indian markets
are overtly dependent may not be true anymore. The meteoric rise of
the domestic mutual funds and insurance industry has changed the dynamics
of money flow into equities. The net FII investment in FY08 stood at
a huge $ 16 billion. Yet it paled in contrast to the domestic inflows.
Direct inflows and MFs together stood at about $19 billion. Moreover,
the insurance sector that garnered a staggering $32 billion of which
about 50% is believed to have flowed into equities. Moreover, of the
$ 15 billion pension & PF money, about 5 % is also believed to
have come into equities.
However,
domestic investors cannot match their current outflows that are bunched
up together in September /October. The current global meltdown is been
attributed to the huge de-leveraging which has resulted in the sell
off in India and globally. That said, the outlook for equity flows
remains rosy. India's savings rate of about 36% of GDP of $1.18 trillion,
yields a $410 billion as savings. Half of this may move into creation
of long-term assets and for government claims. Of the other half even
if 10% flows into equities—which amounts to $ 20 billion—it should be
sufficient to revive our markets. Even after this Indians will be underinvested
in equities as an asset class!
It
is a known fact that the government has a huge fiscal deficit and is
strapped for funds and may have to divest stake in PSUs. Hence, one
of the ways to attract domestic money into equities could be attractively
price high dividend yield IPOs. This will bring back the confidence
in equity markets. It will be even better if the government backs it
up with commitment to reforms, i.e., opening up of FDI limits, relaxation
of ECBs and no ad hoc changes in government policies on SEZ, cement,
mining policy, etc.
A
lower short-term capital gains tax and service tax will also help. Majority
of the FIIs
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that
invest in India come via the Mauritius route hence pay no additional
tax besides STT on their investments while the Indian Investor are
taxed on short-term capital gains or business income. Such disparity
needs to be removed urgently to attract investments in i the capital
markets by the Indian Investor! We believe in non-partial rules for
all investors hence any investor who wants to invest in India should
only be allowed through-FII route, which will also allow the regulators
. to have full information and regulatory control over them. To encourage
this, our guide- . lines and approval process should be friendly enough
for investors to prefer the FII route. This trend has been established
with increased recent FII registrations hence there is no need to
allow any alternative investment route into India Historically, the
P-Note route was an easier way to invest in India against the FII route.
This resulted in offshore lending and borrowing by PN writers, which
has definitely led to the market fall as disclosed by the recent Sebi
data. We should put an end to this and create an effective securities
lending and borrowing mechanism. Until then, no one should be allowed
any alternative route to use the same as it's unfair to the players
who don't have similar access to such products, i.e., the domestic
investors and the long only FII funds! All registered FII investors
can use the stock futures to hedge their portfolio as the stock futures
segment is a very active segment with decent volumes.
In
the current crisis, domestic MFs and insurance companies have invested
heavily and not faced any major redemption pressures which shows the
maturity of the Indian investor. Hence, we must encourage and through
appropriate policy create an equally powerful in vestor in the form
of the domestic mutual funds and insurance companies which have a long-term
investment mindset and are not leveraged. This move will also benefit
FII investor as they will be able to sell their holdings without a large
impact unlike now when they face re-demption pressures due to global
factors!
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