The Calpers Effect

Ten years after the Narasimha Rao government allowed foreign institutional investors (FIIs) to invest in Indian markets, the country is witn...

Ten years after the Narasimha Rao government allowed foreign institutional investors (FIIs) to invest in Indian markets, the country is witnessing an influx of giant pension funds exploring new avenues of investments. The FII activity in India gathered momentum after the entry of CalPERS (California Public Employees’ Retirement System), the giant US-based pension fund – and the largest in the world – in July this year. If market sources are to be believed, CalPERS has already started investing in India in a small way. One month after the arrival of CalPERS, three more big pension funds have now registered with market regulator Securities and Exchange Board of India. UN Joint Staff Pension Fund, Missouri Teachers’ Fund and Missouri Non-teachers’ Fund together manage assets worth over $75 billion. Stock market veterans believe that the entry of these pension funds is a vote of confidence of foreign investors in the Indian markets and the economy. CalPERS, which manages assets worth $166 billion (Rs 768,580 crore), came to India after keeping away for almost ten years. It may be noted that India’s total market capitalisation is only $220 billion. Even as a bevy of foreign pension funds is entering India, it’s ironical that our own pension funds are not allowed to invest in the equity market. It’s not without reason, considering the way some our institutions like UTI were short changed by scamsters in the past.

But their entry does not mean a sudden massive inflow of funds. Much will depend on the performance of companies, shareholder returns and corporate governance standards. CalPERS is widely watched in the US for its tough stand on corporate governance norms.

Moreover, India is at the takeoff stage. The economy in general is growing fast and the markets are witnessing genuine and good quality IPOs (initial public offerings). So it’s also true that large investors can’t afford to ignore India for a long time. JM Morgan Stanley Chairman Nimesh Kampani says that India’s market capitalisation will double from $220 billion to $450 billion within five years. This is almost equivalent to the current GDP of India. Foreign investors, 602 of them registered with Sebi now, have made a total investment of $26.6 billion (Rs 123,150 crore) in India since 1993. While it took almost 11 years for FIIs to bring in this kind of money, India can get $50 billion in the next five years if all these giant pension funds start investing in India seriously.

If India can attract more and more funds like CalPERS, big investors in Japan, Germany and the UK also to make a beeline to India. In order to sustain their interest, India needs to take the economy forward by cutting the deficit, increasing the employment level, boosting the industrial output and capital formation and keeping inflation under control. The market also needs to be more transparent and deep with tight vigilance and less manipulation. The market should become mature and strong so that our government will be confident enough to allow our local pension funds to invest in stocks, something that they are not allowed to do yet.