“The Most Extraordinary Country”* Doing Business in India

1. “The Most Extraordinary Country”* Doing Business in India *Mark Twain A Group 6 initiative

2. A Basic Question Why does the bankruptcyof a company 8000 miles away from us lead to the sensex falling from 20000 basis points to 8000 basis points?

3. foreign institutional investors

4. US $ 5 billion = Rs 22780 crore

5. US $ 5 billion is equal to the total GDP of Somalia.

6. 2008 Lehman brothers = Rs 2000 crore AIG = Rs 1461 crore Merrill lynch = Rs 1000 crore.

7. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • What is an FII? • An institution established outside India, which invests in securities traded on the primary and secondary markets in India • Examples: pension funds, mutual funds, investment trusts, university endowment funds

8. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Foreign investment banks are not permitted to directly invest in shares on the Indian stock exchange • Makes investments on behalf of foreign investors, referred to as “sub-accounts”

9. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Qualifying as an FII • Requires a certificate from the Securities and exchange Board of India (SEBI) • Strict qualification standards including professional experience requirements and reputational considerations (“Fit and proper person” determination)

10. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • SEBI “Fit and proper person” criteria include: • financial integrity • absence of convictions or civil liabilities • competence • good reputation and character • efficiency and honesty • no violation of securities regulations in home jurisdiction

11. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Qualifying as a Sub-Account • Also requires a fit and proper person analysis

12. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • FIIs may invest in: • securities in the primary and secondary markets (shares, debentures, warrants of listed and unlisted companies) • units issued by domestic mutual funds • dated Government securities • derivatives traded on a recognized stock exchange • commercial paper • debt instruments – provided a 70/30 equity/debt ratio is maintained

13. Foreign Investment - Options (cont’d) Foreign Institutional Investors (FII) • Limits on the type and amount of investments apply to FIIs • no more than 10% of the equity in any one company • no more than 10% in the equity in any one company on behalf of a fund sub-account • no more than 5% in the equity in any one company on behalf of a corporate/individual sub-account • no more than 24% in the aggregate of the total issued capital of a company to be held by FIIs

14. Why India?

15. The Indian economy has witnessed a paradigm shift since the last decade and is on a robust growth trajectory. Today, the Indian economy boasts a stable annual growth rate, booming capital markets, and  rising foreign exchange reserves.

16. Government encouragement • The Indian government has introduced many other significant changes to encourage FDIs in India. • For example, the Securities and Exchange Board of India (SEBI) recently formulated the guidelines to encourage the operations of foreign brokers, on behalf of registered Foreign Institutional Investors (FIIs), in India. Due to this, the foreign brokers can now set up rupee or foreign currency-denominated accounts to credit inward remittances, brokerage fees, and commissions. 

17. Future prospects • The World Bank has predicted that the Indian economy will register an 8% growth in 2010. If this prediction comes true, India will become the fastest growing economy for the first time, surpassing China's 7.7% growth. • Recent indicators from reputed indices, such as ABN Amro's Purchasing Managers' Index (PMI), UBS' Lead Economic Indicator (LEI), and Nomura's Composite Leading Index (CLI), also support this optimism in the Indian economy.

18. The success of investment prospects in India will depend primarily on the precise estimation of its potential. Overestimation of its possibilities or underestimation of its complexity can lead to failure. For entering India's marketplace, companies will need to have a well-planned strategy backed by careful research and serious thought. For people looking at India as an opportunity for long-term growth instead of short-term profit, the trip will surely be worth the effort.

19. Be Optimistic Despite political uncertainty, infra-structural deficiencies, and bureaucratic hassles, India presents an optimistic scope for overseas investment and is taking necessary steps to attract more foreign investors. No business, irrespective of its size, that is aiming to become a global player can afford to ignore the Indian market.

20. FDI VS FII • Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. • In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation.

21. Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. • While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDI’s are long term.

22. FIIs and the Indian Stock Markets As on September 5, there are over 1484 FIIs and 38 foreign brokers registered to Securities & Exchange Board of India (SEBI). We are also examining whether market movement can be explained by these investors. We often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawl of money from FIIs.

23. After 1991, due to our liberalization process, there was large flow of foreign funds from abroad. Current investments by FII is Rs. 2,55,464.40 Crores as compared to Rs. 2,83,468.40 Crores by the end of 31 December 2007. That implies that they had withdrawn almost 9% of money they had deposited till December 2007. The amount was much in the months of 2008 as compared to corresponding months of 2007, and that is a reason for the volatility of the stock market. In 2008, the net buying is only Rs. 5,603 Crores compared to Rs. 36,869 Crores in 2007. From all this, we can analyze prime facia that the FII's influence market.

24. P-Notes (Participatory Notes) are instruments used by foreign investors that are not registered with the SEBI (Securities & Exchange Board of India) to invest in Indian stock markets. For example, Indian-based brokerages buy India-based securities and then issue Participatory Notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. That is why they are also called Offshore Derivative Instruments.

25. Influence on the Indian Stock Markets The current investments of FIIs is almost 18% of the total market capitialisation. If we explain the things in simple terms, market pundits often attribute the rally of stock market and fall of stock market to the flow of funds by FIIs. We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the major impacts are: -

26. They increased depth and breadth of the market. • Their policy on focusing on fundamentals of the shares had caused efficient pricing of shares. • These impacts made the Indian stock market more attractive to FIIs and also domestic investors, which involves the other major player MF (Mutual Funds). • The impact of FIIs is so high that whenever FIIs tend to withdraw the money from market, the domestic investors become fearful and they also withdraw from market.

29. Now we analyze the net investments' graph from 2003 to 2008. From this, we can see that there is an increase in net investments till 2005 and there was small decrease in investments in the year 2006. But there was a steep increase in the year 2007-08. This was the best period in Indian stock market where stock prices were increased and the market was in good mood.

31. Now this graph represents the relation between gross purchases and gross sales. We can see from the graph that gross purchases are increasing from 2003 to 2007 and gross sales are lower than gross purchases. So we conclude that this caused the market to reach the magical figure of 21,000 in Sensex. But when we look at the year of 2008, the involvement of FIIs is reduced, and we can also find in this year the gross sales is higher than gross purchases. This analysis also indicates the impact of FIIs in markets.

32. In this graph, we took the base year as 2003 and the trends of the investments by FIIs are plotted. We can see from the graph that till 2007, the investment is more than that of 2003, and the most interesting thing is that when we look at 2008, the percentage change in investments is much lower than 2003, even going to the negative side. This finding also leads to our conclusion that the FII's impact on stock market is high.

33. Big FIIs The stock portfolio is based on the quarterly shareholdings data available with the Bombay Stock Exchange (BSE), which lists investors with more than 1% stakeholding as on 31 December. Since then, there could have been changes in their portfolios. Besides, the BSE data only refers to those firms in which these funds hold at least 1%. The valuation of their portfolios is based on the market price of the stocks as on 19 March.

34. Deutsche Bank listed as top FII in India. • New York-based Citigroup Inc. and London-based HSBC Holdings Plc. own the second and third largest portfolios. • Two US investment banks, Morgan Stanley and Merrill Lynch and Co. follow the table toppers. Hong Kong-based brokerage CLSA Asia-Pacific Markets, majority owned by French banking group Credit Agricole SA, comes next.

35. Goldman Sachs Group Inc., the world’s most profitable investment bank, owns Indian stocks worth Rs7,307 crore, while US-based JPMorgan has a Rs6,835 crore kitty. • Swiss bank UBS AG with 5,848 crore worth of stockholding in India, held mostly under its subsidiary Swiss Finance Corp. (Mauritius) Ltd, is the ninth largest in this group followed by BSMA. • While Lehman had more than 1% stake in 29 companies at end-September, it had cut down the portfolio to 14 companies by end-December.

36. Conclusion • There is a need to ease the regulatory framework on Fiis in order to induce more and more investments. • From all the above discussions and data analysis, we conclude that FII has a major impact in Indian stock market. Particularly, the fall on October 17, 2007, in which just a speculation about governments plan to control P-Notes had caused the biggest fall in Indian stock market, even market had to be closed for one hour without trade. The impact is that even the domestic players and MFs also follow a close look on FIIs. So if FIIs are confident in Indian markets, there is a general perception that market is on a song.

37. Similarly if the Fiis are not confident it can drain a lot out of the markets very fast as happened in 2008. It leads to a chain reaction where a fall of one leads to the fear of another.

38. Namaste! PRITHVI GHAG PRANAY CHAND PRASHAKHASAXENA PRATIK LADDHA PRERNA GUPTA PRATEEK BHARADWAJ