104 CHAPTER – 04 Impact of FDI Reforms in Indian Capital Market Contents: Impact on Foreign Investment in India Impact on Stock Market Regulations Impact on FII Impact on Indian Banking Sector Impact on Indian Insurance Sector Conclusion References Estelar
68
Embed
CHAPTER – 04 Estelarshodhganga.inflibnet.ac.in/bitstream/10603/28083/4/chapter4.pdf · Impact on Indian Insurance Sector Conclusion References Estelar. 105 4.1 FOREIGN INVESTMENT
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
104
CHAPTER – 04
Impact of FDI Reforms in Indian
Capital Market
Contents:
� Impact on Foreign Investment in India
� Impact on Stock Market Regulations
� Impact on FII
� Impact on Indian Banking Sector
� Impact on Indian Insurance Sector
� Conclusion
� References
Estelar
105
4.1 FOREIGN INVESTMENT IN INDIA
Liberalizing foreign direct investment regulations was important part of India’s
reforms, driven by the belief that this will increase the total volume of investment in
the economy, improve production technology, and increase access to world markets.
The policy now allows 100 percent foreign ownership in a large number of industries
and majority ownership in all except banks, insurance companies,
telecommunications and airlines. Procedures for obtaining permission were greatly
simplified by listing industries that are eligible for automatic approval up to specified
levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign
investors investing within these limits only need to register with the Reserve Bank of
India, for investments in other industries, or for a higher share of equity than is
automatically permitted in listed industries, applications are considered by a Foreign
Investment Promotion Board that has established a track record of speedy decisions.
In 1993, foreign institutional investors were allowed to purchase shares of listed
Indian companies in the stock market, opening a window for portfolio investment in
existing companies.
Reforms in Indian economy have created a very different competitive environment for
India’s industry than existed in 1991, which has led to significant changes. Indian
companies have upgraded their technology and expanded to more efficient scales of
production. They have also restructured through mergers and acquisitions and
refocused their activities to concentrate on areas of competence. New dynamic firms
have displaced older and less dynamic ones: of the top 100 companies ranked by
market capitalization in 1991, about half are no longer in this group. Foreign
investment inflows increased from virtually nothing in 1991 to about 0.5 percent of
GDP. Although this figure remains much below the levels of foreign direct
investment in many emerging market countries (not to mention 4 percent of GDP in
China), the change from the pre-reform situation is impressive. The presence of
foreign-owned firms and their products in the domestic market is evident and has
added greatly to the pressure to improve quality.
Estelar
106
4.1.1 Regulatory Framework for Foreign Investment in India:
Foreign Investment in India is governed by the FDI policy announced by the
Government of India and the provision of the Foreign Exchange Management Act
(FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a
notification, which contains the Foreign Exchange Management (Transfer or issue of
security by a person resident outside India) Regulations, 2000. This notification has
been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for
monitoring and reviewing the FDI policy on continued basis and changes in sectoral
policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the
Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and
Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where
prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would
be required.
4.1.2 FDI v/s FII after liberalization
There are two main routes foreign direct investment (FDI) and foreign institutional
investment (FII) for inflow of foreign capital in a country. FDI is considering as
economically viable and strategic foreign investment, because it is mobilizing the
economic resources of the country and it is a long lasting investment. FII consider as
an opportunistic investment because it based on the state of capital market, it is lees
consistent as compare to FDI.
As shown in (Table – 4.1), the foreign investment through FDI start growing from
1992, it was grown by positive growth rate up to 1997-98, but suddenly it was decline
again pick the growth up to 2007-08, this was the year when world economy face
financial crisis. India economy have shown the straight impact on foreign capital
invested in India, this year FDI dropped by more then 50 percent. Foreign Portfolio
investors have shown the same behavior for investment in India this year but it was
found by correlating FDI and FII investment in India, that investment in terms of FDI
was declined but not stopped but institutional investors have shown the opportunistic
behavior resulted FII sale more securities and purchases from Indian capital market.
Estelar
107
Table – 4.1
Foreign capital in India after liberalization
(Rs. Crore )
Year FDI FII
1990-91 144 11
1991-92 264 10
1992-93 608 748
1993-94 992 11188
1994-95 2065 12007
1995-96 2545 9192
1996-97 3621 11758
1997-98 3359 6794
1998-99 2205 -257
1999-00 2428 13112
2000-01 3571 12609
2001-02 3361 9639
2002-03 2079 4738
2003-04 3213 52279
2004-05 4355 41854
2005-06 11120 55307
2006-07 15921 31713
2007-08 33029 109741
2008-09 6155 -63618
Source: RBI Bulletin 2009 Note: (Table-01)
1. Data for 2007-08 and 2008-09 are provisional. 2. Data from 1995-96 onwards include acquisition of shares of Indian companies by
non-residents under Section 6 of FEMA, 1999. Data on such acquisitions are included as part of FDI since January 1996.
3. Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practices. Data from 2000-01onwards are not comparable with FDI data for earlier years.
4. Negative (-) sign indicates outflow. 5. Direct Investment data for 2006-07 include swap of shares of 3.1 billion.
Estelar
108
Figure – 4.1
FDI and FII Flow in India
-100000
-50000
0
50000
100000
150000
200000
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
Years
FD
I &
FII
FDI
FII
It has been observe by the study that, FDI increased in India with a constant growth
rate (Figure - 01), with small downtrend in 2003-04 then sharp upturn in 2005-06,
again declining movement in comparison to previous year but not declined more then
previous. Foreign Institutional Investors (FII) behavior just appositive in comparison
to strategic investor behavior, portfolio investment followed fluctuate pattern and at
the time of global crisis these investors were in hurry for pull back their money.
4.1.3 Route-wise FDI Inflows
Components of FDI inflows are studied over a period of time, this research found that
the value of equity inflows of incorporated bodies declined between 2001-02 and
2003-04, but have been on an uptrend thereafter .Inflows through reinvested earnings
increased continuously through this period, with only 2003-04 as an exceptional year.
Annual fluctuations were observed for the inflows under equity capital of
unincorporated bodies. However, the value of inflows through other capital stagnated
during this period. (Table- 4.2) indicating that there are two main channels for the
entry of FDI into India: the SIA/FIPB Route and the RBI Automatic Approval Route.
From the inception of economic reforms in India in 1991 until the year 2000, most of
the FDI came through the government route as there was strict monitoring of the
approvals; therefore, FDI coming through the SIA/FIPB route was greater than the
FDI coming through the RBI rout
Estelar
109
Table – 4.2
Route-wise FDI Inflows (In Million USD)
Source: SIA Newsletter April, 2009.
Note: 1. Inflows through ADRs/GDRs/FCCBs against FDI approvals have not been included. 2. # Data prior to 1996 not provided by the RBI. 3. From 2003, RBI’s various NRI schemes inflows included under the heading RBI’s Automatic Route.
However, there has been a dilution of this trend in the past five years. With the
investment boom in India and different states competing for FDI, the government has
eased foreign investment regulations leading to a spurt in FDI coming through the
RBI route, which is a positive sign. During 1991, as much as 54.1 per cent of total
FDI was channeled through the FIPB route in contrast to 45.9 per cent through the
Year
FIPB
Route
RBI
Automatic
Route
Inflow
through
acquisition
of existing
share
RBI
Various
NRI
schemes
Total
1991 (Aug-Dec) 78 NA NA 66 144
1992 188 18 NA 59 264
1993 340 79 NA 189 608
1994 511 116 NA 365 992
1995 1264 169 NA 633 2065
1996 1677 180 88 600 2545
1997 2824 242 266 290 3621
1998 2086 155 1028 91 3359
1999 1474 181 467 83 2205
2000 1474 395 479 81 2428
2001 2142 720 658 51 3571
2002 1450 813 1096 2 3361
2003 934 509 637 NA 2079
2004 1055 1179 980 NA 3213
2005 1136 1558 1661 NA 4355
2006 1534 7121 2465 NA 11120
2007 2586 8889 4447 NA 15921
2008 3209 23651 6169 NA 33029
2009 (Jan-Mar) 1992 3528 635 NA 6155
Total 27867 48343 21012 2509 99732 Estelar
110
RBI route. No inflows on account of acquisition of existing shares were recorded for
this year. The route-wise FDI inflows fluctuated till 1998. During 1998, the FDI
inflows through the SIA/ FIPB route accounted for 62.1 per cent of the total FDI
inflows, while those through the RBI’s automatic route touched an all-time low of
only 7.3 per cent. However, by this year, inflows through acquisition had gained a
significant share of 3.06 per cent in total FDI inflows. The following period until
2007, for which the latest figures are available, recorded an increase in share of
inflows through the RBI’s automatic route, a decrease in the shares of inflows through
the SIA/FIPB, while the share of inflows through acquisitions remained banded
between 30 to 20 per cent.
4.1. 4 FDI in India by Automatic Route
FDI in sectors/activities to the extent permitted under automatic route does not require
any prior approval either by the Government or RBI. The investors are only required
to notify the Regional Office concerned of RBI within 30 days of receipt of inward
remittances and file the required documents with that office within 30 days of issue of
shares of foreign investors.
In this research it has been found that automatic approval route of FDI is the most
preferred route adopted by foreign investor for investment in India, up to 2009 this is
the rote which attracted largest shares of foreign capital 48343 million US $ in
comparison to other route (Table-4.2). It was star growing by year 1992 up to year
1997 then decline, again shown the growth by year 2000, and after 2000 it’s shown
continuous growth.
Figure – 4.2 Foreign Capital through Automatic Route
-
0
5000
10000
15000
20000
25000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
200
9 (Jan
-Mar)
Estelar
111
4.1.5 FDI in India by Government Approval
FDI in all activities not covered under the automatic route require prior government
approval. Approvals of all such proposals including composite proposals involving
foreign investment/foreign technical collaboration are granted on the
recommendations of Foreign Investment Promotion Board (FIPB).Prior government
approval route for foreign investment, in the following circumstances, needs approval:
a. Activities which require prior government license
b. Proposal exceeding the sectoral caps or where provisions of Press Note 1
(2005 Series) issued by the Government of India are attracted;
c. Where more than 24 per cent foreign equity is proposed to be inducted for
manufacture of items reserved for the Small Scale sector
d. Proposal for acquisition of shares of an Indian company in Financial Sector
and where the transactions attract the provisions of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997.
This research studies indicate that FDI under government’s route has shown the
fluctuation but it was always then a certain level. In between 1990 – 2000 it was
highest in 1997-98 by this route and from 2000-10 it was highest in 2008-09. This
type of movement in government approval routes is because of changing
government policy year by year.
Figure – 4.3 Foreign Capital through FIPB Route
0
500
1000
1500
2000
2500
3000
3500
1991
(Aug
-Dec
)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(Ja
n-Mar)
Estelar
112
4.1.6 FDI in India by Merger and Acquisition Route:
Merger & Acquisitions are increasingly been recognized as a business tool. The most
widely practiced business strategy i.e. organic growth story - involving steps that a
company would take to augment its human resource, clients, infrastructure resources
etc thus resulting in organic growth of its revenues and profits. The M&A route
interchangeably used as inorganic growth story would provide immediate extension of
company’s human resource, clientele, infrastructure thus catalyzing the growth. Given
the fact that the economies are globalizing, more and more M&A are happening.
M&A are now driven more with business consideration rather than dominated by
regulations. Yet the local legislations do play in role in shaping the M&A.
With the FDI policies becoming more liberalized since the last many years, Mergers,
Acquisitions deals are growing at a good rate. The list of past and anticipated mergers
and acquisitions in India covers every size and variety of business providing platforms
for the small companies being acquired by bigger ones. India companies merge with
some big foreign companies as ell as the some big foreign companies merge with
India companies for getting the advantage of large Indian market. The merger and
acquisition deals in India after liberalization followed continuous growth (Figure –
4.4), this growth get accelerated after 2003 – 04 and it was highest in year 2008-09,
then face global crisis and declined by a substantial share. These routes are preferred
by strategic investors who are utilizing the economic resource of a country.
Figure – 4.4
Foreign Capital through Merger and Acquisitions Route
0
1000
2000
3000
4000
5000
6000
7000
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(Ja
n-Mar)
Estelar
113
4.1.7 FDI in India by NRI schemes
Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to
invest in the primary and secondary capital markets in India through the portfolio
investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire
shares/debentures of Indian companies through the stock exchanges in India.
� The ceiling for overall investment for FIIs is 24 per cent of the paid up capital
of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent
of the paid up capital in the case of public sector banks, including the State
Bank of India.
� The ceiling of 24 per cent for FII investment can be raised up to sectoral
cap/statutory ceiling, subject to the approval of the board and the general body
of the company passing a special resolution to that effect. And the ceiling of
10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval
of the general body of the company passing a resolution to that effect.
Figure – 4.5
Foreign Capital through Various NRI schemes
0
500
1000
1500
2000
2500
1 2 3 4 5 6 7 8 9 10 11 12
Investment in India by this route not generate any substantial share after liberalizing
India economy, this was one of the low considered route for foreign inflow in India. It
start picked growth in 1994-95 (Figure – 4.5), maintained that for 1996 0nly, it was
633 million US $ in 1995 (maximum), then 600 million US $ in 1996, then it start
declining and dropped up to 290 million US $ in 1997. After 2003 onwards foreign
investors reject that route of investment in India.
Estelar
114
4.2 IMPACT OF LIBERALIZATION IN STOCK MARKET
REGULATIONS
4.2.1 SEBI and Capital Market
The securities and Exchange Board of India was incorporated as an investor
protection body in 1992 by virtue of special enactment, namely by SEBI Act 1992.
The act came into force on from Jan30, 1992. It made provision for the establishment
of board to protect the interest of investors in securities and to promote the
development of, and to regulate securities market and for matter connected therewith.
The primary duty of board, as provided in Sec.11, is to protect the interest of investor
in securities and to promote the development and of to regulate the securities market
by such measures, as it think fit.
4.2.2 Landmark Policy Initiative by SEBI
The prominent policy initiative adopted by SEBI during 1998 include, among other
things, popularizing dematerialization, formulating regulations for derivatives, buy –
back, Collective Investment Schemes(CIS), credit rating agencies and also
amendments to the take over regulation of 1992. The efforts in nudging the market in
to electronic form of trading have been successful, with over 30 to 40 percent of
delivery in the demat mode at times, even greater then 50 percent of BSE. The
regulators expect at least 70 percent of trading to be delivered in the paperless mode
and 99 percent by 2000.SEBI has allowed exchange to set up terminal abroad and
extent their reach within India too. BSE and NSE have a presence in
approximately200 cities each. While Koakata , Delhi and Ludhiyana are exploring the
possibilities of expanding their terminals in and around these cities. Regulation on
Derivatives trading, Buy-back, credit rating, roles of mutual fund trustees and
amendments to takeover regulations wee finalizes during 1998. The derivatives
trading committee suggest a phase’s introduction to derivatives trading beginning of
with stock index future. Complex types may be introduces after market participants
gain comfort and familiarities with the products.
� The L C Gupta Committee laid down the ground rule for a derivative
exchange to operate as effective self regulatory organizations and suggest a
more stringent governance mechanism. The regulator permit buy back of share
Estelar
115
through a tender offer to existing shareholders, a book building process, open
market purchases and barred negotiating deals, spot transaction and private
placement.
� The Bagwati Committee also clears the deck with regarded to the impact of
buy back on takeover rules. The CIS bought under the purview of SEBI.
� The Dev Committee in its interim recommendations made credit rating
mandatory for any such scheme that wish to raise money from public and
directed that and their meaning be incorporated in offer documents,
advertisement and all publicity material.
4.2.3 Report of Informal Group on Primary Market
The group headed by Dr S N Acharya, Chief Economic Advisor Ministry of Finance
deliberate on the following issue – reasons for the slow down in primary market,
measure to improve the market and creation of a database for the private placement,
and regulatory issue relating to private placement. In order to look for possible
explanation for the poor performance of market, the group looked in to following
aspects:
� Demand/Supply Issue: Lack of demand for capital fund, lack of supply of
funds.
� Regulatory Issue: Stringent entry norms / disclosure requirement: over
regulation of market.
� Liquidity Aspect: Illiquid secondary market – lack of exit routes for majority
of shares, absences of market after an issue, overpricing of an issue which
leaves no premium to the investor in the post issue market.
The SEBI Board accepted most of the recommendations of the informal group on the
primary market and the following may be mentioned in this regard:
� Primary to be made compulsory trough the depository mode after a specific
date.
� 100 percent book building in respect of issue of Rs 25 crore and above.
� Reduction in number of mandatory collection center in respect of issue above
Rs 10 crore to four metropolitan cities.
� Measures taken to revive the secondary market include:
a. The Companies (Amendment) Ordinance 1998 dated 31 October 1998,
empowering companies to purchase their own shares subject to SEBI
regulation.
Estelar
116
b. Amendments of SEBI takeover regulations permitting easier
consolidations by promoters.
c. Publishing of unaudited result by listed companies on quarterly bases.
d. Rolling settlement in respect of dematerialization securities and
stringent margin requirement to curb excess volatility in share price.
To facilitate the flow of fund to the infrastructure sector, SEBI decided to grant
specific relaxation to public issue by infrastructure companies that are defined under
Section 10(23G) of the Income Tax Act, 1961.
4.2.4 Promoting OTC exchange:
� On the line of highly successful NASDAQ, the OTC exchange needs to be
seriously promoted. It can become an effective vehicle for the valuation of
technology stock and provide an efficient trading mechanism to investors.
4.2.4 Disinvestment PSE shares:
� The importance of correct price of PSE share is undisputable. This can be
done only by issuing the shares in domestic market rather then opting as GDR
route, according the expert observation of the capital market. Assuming that
about five million shareholders are created in the current financial year due to
PSE investment within the country.
4.2.6 According to prime database
� The central government should ease the “stringent and impractical” entry
norms for new public issue to help good companies taped to the market. The
agency preferred that entry barrier should be reasonable and focus should be
on quality, quantity and delivery format of pre – issue and post – issue
information disclosure.
4.2.7 Task Force to Track Vanishing Companies
SEBI joined force with the Department of Economic Affairs and Department of
Company Affairs to crackdown on promoter of companies that disappeared after
going public. The joint committee will comprise the SEBI chairman and also director
from DEA and DCA.
Estelar
117
The committee comprises the official of DCA and SEBI reviewed in its meeting held
on July 19, 1999, the various action initiated by task force against unscrupulous
promoters. Based on the study and physical verification undertaken by the stock
exchange for companies that come out with initial public offering after 1992, SEBI
had at present identified 80 companies that were not traced at their registered office
address as mention in the offer document. SEBI follow the following criteria, to term
a company as vanishing company:
1. Companies that did not comply with listing requirement such as submission of
annual report, schedule of distribution, communication of the record date, ect ,
for the period of two years.
2. Where no correspondent has been received by the exchange for a long time
and.
3. No office of the company is located at the mention registered office address.
4.2.8 Regulating the Debt Market:
The RBI at present meeting the high – level committee has sought to take complete
power to regulate debt market is it private or government debt. It felt that this would
lead to parity and less confusion in the market. It also wanted to regulate the private
placement which account for a huge chunk of debt issue. The RBI feels that since
most of the market includes interest rate, is under its control it would be best
institution to regulate debt market. The RBI at present, regulate all government
securities. This in itself is a market worth over several thousand crore. Listed
securities are covered by the SEBI while private placement goes unchecked. The later
segment would be moved under the SEBI. The RBI it may noted act as both the issuer
of government debt and regulator thereof.
4.2.9 Market capitalization in BSE after liberalization
The annual turnover, market capitalization and BSE Sensex increased sharply by 99
per cent in 1991-92 Share markets were un-precedentedly buoyant due to the
liberalization measures announced by the government to attract investments. Some
important proposals announced in the Union Budget of 1992-93, such as the abolition
of wealth tax on financial assets, abolition of the office of the CCI, free pricing era,
permission for Indian companies to raise funds abroad and so on triggered volumes on
Estelar
118
BSE. Irregularities in the securities transactions of banks and financial institutions
also added to the speculative pressure in the stock markets. These irregularities were
detected in 1992-93, when the scam broke out which led to the streamlining of stock
market operations by BSE authorities, sharply reducing the turnover. In 1996-97, the
turnover at BSE rose by 148 per cent. Badla was revived, which led to massive rise in
the turnover in the specified group of shares. Moreover, the extension of trading
terminals outside Mumbai in September 1997 and rapid progress in trading in demat
paperless form were some of the reasons for increase in turnover witnessed from
1996-97 to 1998-99.
During 1999-2000, the BSE turnover witnessed a sharp increase of 119 per cent. The
market was driven by large FII inflows, improved corporate performance, sound
macro-economic fundamentals, and upgrading of India’s international credit ratings
stable to positive by international credit rating agencies. In 2000-01, the increase in
turnover was 46 per cent. This was due to a slow down in FII inflows, large sell offs
of new economy stocks on Nasdaq, increase in international oil prices, payment crisis
at some stock exchanges, and liquidity problems with some cooperative banks.
During 2000-2010 the BSE turnover was grown by good rate in comparison to the
period 1991-2000. It was because of large number of IPO’s and introduction of ADR
and GDR. The growth was maximum in 2008-09 because of maximum FDI this year
as well as large merger and acquisitions.
The number of listed companies rose from 2,471 in 1990-91 to 5,782 in 2001-02. The
market capitalization is an indicator of the addition to the wealth of share owners. Its
increase is a function of price change and supply change coming from new issues. In
the first year of economic reforms, market capitalization increased by 256 per cent. It
was the result of an increase in shares prices due to an announcement of liberalization
measures and the listing of six PSU stocks for the first time on the stock exchange. In
the subsequent year, 1992-93, market capitalization declined due to irregularities in
securities transactions. Shares prices firmed up again in 1993-94 due to increased
flow of foreign funds, increased investor interest, and speculative trading.
Estelar
119
Table: 4.3: MARKET CAPITALISATION – BSE
(Rs Crore)
Year/ Month (End-
period)
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total