Putting money on stability

Similarly, when Hong Kong was handed over to China recently, several fund managers based in this key financial hub turned a bit anxious if not nervous over the future of their operations. Stock market sources aver that there has been a steady rise in fund flow as well as enquiries from the Far East region and Hong Kong in the last one-and-a-half months.

The process of integration of Indian stock markets with other markets in the world seems to be a smooth affair. This was not the case earlier. In the seventies and eighties whenever the Wall Street and the European markets collapsed, Indian markets remained insulated from the after-effects.

The process was hastened with the launching of overseas GDR offerings by Indian companies. With 64 Indian GDRs listed on London and Luxembourg stock exchanges and many more waiting in in the wings, the India story has become popular among foreign investors as never before.

Now Indian companies like Infosys Technologies are looking at the option of listing their shares on stock exchanges in the US by implementing the stringent US GAPP (Generally Accepted Accounting Principles) rules. “With the liberalisation of the economy and opening up of the markets, there has been a sea change in the structure and direction of the Indian markets.

Modernisation and technological upgradation of trading systems prompted more foreign fund managers to come to India and Indian companies to go abroad from listing,” said an official with a leading US firm who came to register with the Securities and Exchange Board of India (SEBI) last month.

In fact, more and more foreign investment firms are flocking to Mittal Court the head office of the SEBI in South Mumbai to register with the Indian capital market regulator as a foreign institutional investor (FII).

In May and June, ten new foreign firms, including Robertsons Stephens and DBL Asset Management of Singapore, registered with SEBI, taking the total number of FIIs operating in India to 453.

Has India become an investment destination by default? A section of market experts believe that the messy structural reforms in the economies of South Korea, Malaysia and Thailand and the currency/bond market upheavals in the Eastern European countries like Czech Republic and Poland came as an the advantage for the Indian markets.

The theory being propounded by this school of thought has it that had their economies performed well, foreign funds would have flocked to their markets. Hong Kong-based Jardine one of the largest FIIs operating in India switched its legal domicile to Bermuda and removed its stock from the Hong Kong Stock Exchange and listed on London and Singapore.

However, many others including the Bombay Stock Exchange president M G Damani believe that Indian growth rate itself is a good indicator of the path ahead. With the economic growth rate averaging seven per cent and cheap price/ earning ratio of nearly 12.5 , India is ahead of many other developing countries in Asia.

Moreover, the corporate sector is now showing signs of a recovery from the clutches of high interest rates and demand recession. “Corporate India seems to be signalling better times ahead based on our analysis of 1997 financial results of nearly 250 companies. About 26 per cent of the companies with lower earning declared increased dividends.

We believe these higher dividend payouts reflect the managements’ optimism for the current year and beyond,” says Pravin Shah of Morgan Stanley.Foreign fund managers have seen writing on the wall. If political instability and the uncertain direction of economic reform had dampened the spirit of investors in the first half, things started looking up from June onwards. The CII survey on business confidence where 45 per cent of businessmen indicated that things have looked up also reinforces this fact.

SEBI officials say that net FII investments never exceeded $ 200 million in the calendar year of 1997. FIIs brought in $ 362.9 million in the month June alone, taking the net cumulative investments by foreign firms to $ 8.484 billion since the country opened up Indian markets for foreign portfolio investment in the beginning of 1993.

This is one reason why the BSE sensex has remained above the 4,000 level and touched the 52-week high in the last fortnight.

Yet another reason for the continued FII optimism on the Indian markets is the ongoing efforts of the government and regulators to modernise and unshackle trading facilities. Bourses were modernised by introducing online computer trading, scripless trading system (depository) was set up, vigilance and surveillance systems were improved and capital adequacy norms for market intermediaries were tightened.

Finance Minister P Chidambaram made them more happy by hiking the foreign equity level in Indian companies from 24 per cent to 30 per cent. However, much more needs to be done to monitor the end-use of funds, curb bad deliveries/fake shares and speed up share transfer process.

It is not that FIIs are sold to India. The bear hug on the Indian markets which started in 1994 and continued right upto mid-1997 has not gone well with FIIs. Many FIIs had burnt fingers in the primary market boom. Even the interest shown by many private equity funds to invest in new ventures in India — from abroad has now considerably waned as they found few good companies for investment. Similarly, several GDRs floated by Indian companies turned out to be bad investment for foreign investors.

For example, GDRs of SIV Industries and Tube Investments showed negative returns of 80 per centre and 75 per cent respectively.

The increasing presence of FIIs will ensure gradual gobalisation of the Indian markets. Jardine Fleming or Morgan Stanley, which have large exposures in India, are big operators in other countries as well.

Depending on the economic/political conditions in a country, there will be fund reallocations by various FIIs. However, Indian players especially financial institutions (except for the UTI) have not grown to have big exposures as like the FIIs.

It will take several years for Indian investors to grow and invest outside the country. It will also require legislative changes and measures like full convertibility of the rupee on the capital account for outflow of capital from the country.