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Journalism of Courage
If the Budget was a minor disappointment for the stock market, a proposal by market regulator to restrict foreign funds’ trading could deepen India’s stock market slump.
The stock market has been on a downward spiral ever since the Sebi released on Monday a draft paper containing a proposal to disallow foreign funds from dealing in derivatives —with underlying domestic securities—that are issued outside India. The benchmark Sensex has fallen by 93 points, or 2.84 per cent, in four sessions after the Budget presentation on February 28.
On Thursday, Sensex declined by 35 points to 3,190.35 as investors continued their selling spree. While the market was cool to the Budget, the Sebi proposal on derivatives has scared foreign institutional investors (FIIs). These instruments include participatory notes (contracts issued to overseas investors who want exposures to Indian stocks but don’t want to go through the required cumbersome procedures like registration as an FII).
“Any measure that curbs foreign fund participation is not healthy and would slowdown inflows,” said Krishnamurthy Vijayan, CEO of JM Capital Management. According to dealers, the Budget, Sebi proposal on FIIs and war fears have dampened the sentiment. Foreign funds have about $15 billion invested in India, nearly a quarter of which analysts estimate is routed through instruments that the watchdog proposes to ban.
The proposals have cutailed the flow of foreign portfolio investment, with offshore funds reducing their exposure to Indian equity by $5.2 million this week—after a net inflow of $84.6 million in February and $221.4 million in January. “Implementation of such move is likely to irritate genuine players and to that extent business might suffer,” said Shankar Char, senior manager institutional sales at Cholamandalam Securities.
The Bombay Stock Exchange has lost Rs 19,300 crore ($4billion) in market capitalisation since the beginning of 2003, with domestic investors pulling out money after foreign fund investment in the new year fell short of expectations, mainly due to uncertainty over Iraq. Foreigners can now buy and sell domestic stocks and derivatives only if they are registered with the regulator. They are required also to appoint a tax consultant and custodian, who liaises with the stock market regulator, the central bank and exchanges.
Overseas arms of foreign funds or brokers registered with the Indian regulator often issue participatory notes to entities that don’t wish to register in India but nevertheless want exposure to some local stocks. These notes then function in lieu of the underlying Indian shares.
For example, an unregistered foreigner can take an exposure to blue-chip software stock Infosys Technologies through these notes instead of directly buying the company’s American Depository Receipt listed on Nasdaq. This would work out cheaper as the local stock now trades at a 40 per cent discount to the ADR. Overseas investors also use the facility to test the waters, said a director at a India-registered foreign brokerage dealing in participatory notes.
“If they are convinced that India is attractive for long-term investment, they then apply for registration,” said the director, who declined to be identified. (With inputs from Reuters)
